Copyright © 2012 by Karim R. Lakhani and Michael L. Tushman

Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author.

Open Innovation and Organizational Boundaries: The Impact of Task Decomposition and Knowledge Distribution on the Locus of Innovation Karim R. Lakhani Michael L. Tushman

Working Paper

12-057 January 5, 2012

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OpenInnovationandOrganizationalBoundaries:TheImpactofTaskDecomposition

andKnowledgeDistributionontheLocusofInnovation1

KarimR.Lakhani(k@hbs.edu)&MichaelL.Tushman(mtushman@hbs.edu)

HarvardBusinessSchoolWorkingPaper

January5,2012

1Pleasecontacttheauthorswithyourcomments.WesincerelythankPaulAdler,CarlissBaldwin,AnnaGrandori,EricvonHippelandCharlesO’Reillyfortheircritiqueandsuggestionsforimprovementsforthispaper.Allmistakesandomissionsareourown.

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Abstract:

Thispapercontraststraditional,internalorganization‐centeredmodelsof

innovationwithmorerecentworkonopeninnovation.Thesefundamentally

differentandinconsistentinnovationlogicsareassociatedwithcontrasting

organizationalboundariesandorganizationaldesigns.Wesuggestthatwhencritical

taskscanbemodularizedandwhenproblem‐solvingknowledgeiswidely

distributedandavailable,openinnovationcomplementstraditionalinnovation

logics.Weinducetheseideasfromtheliteratureandwithextendedexamplesfrom

Apple,NASA,andLEGO.Wesuggestthattaskdecompositionandproblem‐solving

knowledgedistributionarenotdeterministicbutarestrategicchoices.Ifdynamic

capabilitiesareassociatedwithinnovationstreams,andifinnovationtypesare

rootedincontrastinginnovationlogics,thereareimportantimplicationsforthe

firm,anditsboundaries,design,andidentity.

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Introduction

Therelationsbetweenthefirm’sdesign,itsboundaries,anditsabilitytoinnovate

hasbeencentraltoscholarsofinnovation,R&D,strategy,andorganizationtheory

sinceAbernathy’s(1978)seminalempiricalworkontheautomotiveindustry.

Abernathyexploredtherelationsaproductiveunit’sboundary(allmanufacturing

plants),theirdesign(fluidvsspecific),andtheirabilitytoexecuteproductand/or

processinnovation.Similarly,buildingonMarchandSimon(1958),Thompson

(1967),BurnsandStalker(1966),andWoodward(1965),LawrenceandLorsch

(1967)exploredtherelationsbetweenorganizationboundaries(businessunits),

design(differentiationandintegration),andinnovationinasetofindustriesthat

variedbyuncertainty.Thisearlyempiricalworkledtoarangeofscholarsasking

whataretherelationsbetweenafirm’sboundaries,itsorganizationaldesign,andits

abilitytoinnovate.

Inorganizationaleconomics,thenotionoforganizationalboundarieshasbeen

rootedintransactioncostlogic.Economistsfavoranexplanationbasedon

minimizingtransactioncosts(Coase,1937).Manyactivitiesrelatedtoinnovation

andthedesignandproductionofgoodsandservicesaredifficulttocontractonthe

openmarket.Thesetransactionscostsmakeitefficientfortheemergenceoffirms

andassociatedboundariesthatreducethesecostsbyintegratingtheseactivities

insidethefirm(Williamson,1981,1975;).

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Thesescholarlytraditionshaveattemptedtoclarifytherelationsbetween

innovationandthelogicofdifferentiationbetweenthefirmanditssurrounding

environment(ormarket).Theseliteratureshavefocusedonunderstandingwhich

setofactivitiesshouldbeinsideoroutsidethefirm’sboundaries(egGrandori,

2001;PfefferandSalancik,1978;JacobidesandBillinger,2006;Santosand

Eisenhardt,2005;Lavie,Kang,andRosenkopf,2011).Theprimaryapproaches

employedbythesetraditionshavebeenrootedincost‐benefit,knowledge,or

resourcedependenceanalyses(egScottandDavis,2007).

Organizationtheoryandstrategyscholarshavenotedthatcoretovaluecreationis

thecreationofcomplexgoodsandservicesrequiringongoingknowledge

productionandtransferamongstdiversesettings(MarchandSimon,1958;

Chandler,1977;Grandori,2001;NickersonandZenger,2004).Theburdenof

continuousknowledgecreationimposeshighcoordinationcoststhatarebest

minimizedthroughamanagerialhierarchythanadistributedapproachinopen

markets(NonakaandTakeuchi,1995;Thompson,1967;TushmanandNadler,1978;

KogutandZander,1992).Foranythingbutthesimplestproblems,thevisiblehand

ofanorganization’smanagementisrequiredtodefineandselectproblemsthat

firmssolveforvaluecreation(NickersonandZenger2004;Chandler,1990).For

example,individualautonomousagents,unaffiliatedandnotboundbycontractsare

unlikelytocreatecomplexproductsandservices(NohriaandEccles,1992).Finally,

asignificantbodyofresearchinorganizationtheoryisrootedonsettingfirm

boundariesinawaythatprotectitfromdependenciesinitstaskenvironmentand

putsboundariesaroundcriticaltask,power,andcompetencecontingencies(eg

Thompson,1967;PfefferandSalancik,1978;Aldrich,1979;SantosandEisenhardt,

2005).

Innovationscholarsfromvariousperspectivessuggestthatknowledgecreationfor

innovativeproductsandservicesoccursinahighlydistributedmanneroutsidethe

boundariesofthefirm.BuildingonCampbell’s(1969)workonsocio‐cultural

evolution,studiesoftechnologydevelopmenthaverepeatedlyshownan

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evolutionaryprocessoftechnicalchangewheredesignandknowledgevariation

competeinoccupational,entrepreneurial,andorganizationalcommunitiesand

eventuallyconvergeonindustrystandardsordominantdesigns(Abernathy,1978,

Utterback,1994;Aldrich,2008;Murmann,2003;TushmanandRosenkopf,1992).

Muchoftheworkonourunderstandingofinnovationdynamicsandtheassociated

organizationalimplicationsarerootedinthiscompetitiveviewoftechnological

innovation.

Incontrasttothiscompetitivevariation/selectionprocess,usersorpeersoutside

thefirmareimportantsourcesoffunctionallynovelinnovations(vonHippel,1988;

2005;Benkler,2006).Theseusersconstituteself‐organizingcommunitiesthat

freelyshareknowledge(BaldwinandvonHippel,2011;FrankeandShah,2003;

FarajandJohnson,2011,O’MahonyandLakhani,2011).Theopensourcesoftware

movementcrystallizedanalternativeinnovationecosystemwhereexternal‐to‐the‐

firmusercommunitiesdesign,develop,distributeandsupportcomplexproductson

theirownorinalliancewith(orinsomecasesoppositionto)incumbentfirms

(LakhaniandvonHippel,2003;vonHippel,2005;BoudreauandLakhani,2009;

O’MahonyandLakhani,2011,LernerandSchankerman,2010).Theriseand

prevalenceofcommunityorpeerinnovation,withtheircontrastinglociof

innovationandnon‐hierarchicalbasesoforganizing,poseachallengetothe

receivedtheoryofinnovation,thefirm,andthefirm’sboundaries.

Weattempttoreconcilethesedivergentscholarlyperspectivesontherelationship

betweenfirmboundariesandthelocusofinnovation.Wearguethattheinnovation

andorganizationaldesignliteraturesmustmovebeyonddebatesbetweenopenvs.

closedboundariesandinsteadembracethenotionofcomplexorganizational

boundarieswherefirmssimultaneouslypursuearangeofboundaryoptionsthat

include,“closed”verticalintegration(egKnott,2001;LawrenceandLorsch,1967;

NadlerandTushman,1997),complex,internallyinconsistentorganizationsdesigns

(O’ReillyandTushman,2008;GulatiandPurnam,2009),strategicallianceswithkey

partners(egRothaermelandAlexadre,2009;LavieandRosenkopf,2006),and

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pursuing“open”2boundariesandopeninnovation(egChesbrough,2006;von

Hippel,2005).

Wesuggestthattwocontingenciesdrivethedegreetowhichafirmchosesalong

thisclosedtoopenboundarycontinuum;thedegreetowhichcriticaltaskscanbe

decomposedandtheextenttowhichproblemsolvingknowledgeforthesetasksis

distributed.Thesetaskandknowledgecontingenciesarenotdeterministic;they

involvestrategicchoiceforthefirmandshiftastheproductlifecycleevolves(Child,

1972;Grandori,2001;Foss, Husted,andMikhailova,2010;Foss,thisvolume).

Choicesabouttaskdecompositionandknowledgedistributioninformthechoiceof

firmboundaries.Theabilitytounderstandthenatureofthesecriticaltask

characteristicsand,inturn,linkthesechoicestothefirm’sboundariesmaybean

importantdynamicmanagerialcapability(HelfatandPeteraf,2003).Further,

becausefirmshaveseveralcriticaltasksthatdifferalongthesedecomposition/

knowledgedimensions,thefirmislikelytohavemultipleboundarytypes.

Openinnovationmayincreasinglycrowdoutmoretraditionalintra‐firminnovation.

Suchashiftinthelocusofinnovationwillhaveprofoundimplicationsforthedesign,

boundaries,andidentityofincumbentfirms.Twoseculartrendsintheeconomy

drivetheincreasingimportanceofopeninnovation.Thefirstistheincreasing

prevalenceandimportanceof“digitization”(Greenstein,2010),wherein

informationandphysicalproductsarerepresentedinthebinarylanguageof

computers.Whileinitiallyconfinedtopureinformationproductsandsoftware

production,digitizationisatrendthatnowenvelopeslargepartsoftheeconomy.

Importantly,materialobjectsareundergoingtransformationssothattheir

“informationshadow”(BaldwinandClark,2000),i.e.theinformationcomponentof

anymaterialobject,isnowbeingrepresentedasadigitalgood.Thusmaterialand

physicalobjectscannowbecreated,represented,modifiedandtransformedwith

2By“open”wemeanthatproblemsolvingneedsandknowledgeflowbothinsideandoutsidethefirmviainteractionwithmultitudesofexternalactorswhoareeitherembeddedincommunitiesorparticipatingininnovationplatforms.

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thesamerelativeeaseassoftwaregoods.Animplicationofthisdigitizationisthe

opportunitytoapplytheprinciplesoftaskdecompositionwidelyusedinthe

computerhardware(BaldwinandClark,2000)andsoftwareindustry,tomany

morepartsoftheeconomy.

Thesecondandrelatedtrendistheincreasingnumberofactorsthatcanparticipate

inknowledgeproductionatverylowcosts.Overthepastthreedecades,theInternet

andotheradvancedinformationandnetworktechnologieshavedemocratizedthe

toolsofknowledgecreation.Thisongoingseculartrendhassignificantlyeasedthe

costofknowledgedissemination,reducedcommunicationandcoordinationcosts

andmadeiteasiertofindandaccessdistributedknowledgefromalmostanywhere

intheworld(Benkler,2006;Castells,2000,Shirky2008).

Keytoourunderstandingoftherelationsbetweenorganizationaldesign,firm

boundaries,andinnovationistheabilityoffirmanditsleaderstoengagein

strategicdecompositionofunderlyinginnovationtasksandunderstandthe

associatedlocusofknowledgerequiredtoeffectivelydeliverproducts.Thestrategic

decompositionandlocusofknowledgeperspectivearguesthatthearchitectureof

productsarenotfixedeitherinthefirmorinindustries.Instead,executiveschoseto

partitionandre‐partitiontheproblemspacesuchthattheyhavetheoptionto

accessdistributedknowledgeaboveandbeyondthetraditionalemphasisonintra‐

firmtechnologicaldevelopmentoptions.

Strategictaskdecompositionenablesorganizationstoaccessdistributedknowledge

ofthousandsofexternalindividualswithoutresortingtotraditionalmeansof

backwardsorforwardsintegration.Taskdecompositioninthecontextoflowcost

communicationhascatalyzedtheemergenceofself‐organizingcommunitiesthat

areaseffectiveasfirmsininnovationandknowledgeproduction(O’Mahonyand

Lakhani,2011).Thuspreviouslyfirm‐basedinnovationactivitiesmaynowbedone

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ontheoutsideinmarketorcommunitysettings(BoudreauandLakhani,2009)3.At

thesametime,firmsmaydecidetoexitrelationshipswithexternaloropensources

ofinnovationforaperceivedproprietyadvantageassociatedwithmoreintegrated

taskchoices.Wearguethatafirm’sabilityto“refactor,”ordynamicallycomposeor

decomposecriticaltasksareanimportantdeterminantofthefirm’sboundariesand,

inturn,itsabilitytoinnovate.

Hand‐in‐handwithstrategicdecompositionistherecognitionthattheappropriate

knowledgerequiredtosolveinnovationproblemsisbothwidelydistributed(Hayek,

1945)andsticky(vonHippel,1988).Thewidespreadandgeneralphenomenonof

user‐basedinnovationisrootedinusershavinguniqueneedsandsolution

information(vonHippel,1988).Usersexploitthisknowledgetocreatenovel

innovations(RiggsandvonHippel,1994).Thusthelocusofinnovationshiftsto

whereknowledgemaybethestickiesttotransfer,oftenwithusersthatarewidely

distributedintheeconomy.Usersmayalsoformself‐organizingcollectivesand

communitieswhereneedandsolutioninformationarerapidlydiscoveredand

transferredunderacommonfree‐revealingparadigm(LakhaniandvonHippel,

2003;FrankeandShah,2003;BaldwinandvonHippel2011).

Withthedemocratizationofboththetoolsofknowledgeproductionand

dissemination,manymoreactorsoutsidetraditionalfirmboundarieshaveaccessto

uniquesolutionknowledgethatmaybeapplicabletoinnovationtaskswithinfirms

(JeppesenandLakhani,2010;Boudreauetal,2011).Suchtaskdecompositionand

thefactthatwidelydistributedactorshaveaccesstouniqueknowledgepushthe

locusofinnovationoutsidetraditionalfirmboundaries.Wesuggestthattask

decompositionandknowledgedistributionprovideaframeworkforthechoiceof

firmboundaries.Thesestrategiccontingenciesleadtoadifferentsetofdesignand

3Marketsfeaturemanydistributedactorsthatareworkingindependently,inparallelandoftenincompetitiontosolveinnovationproblems.Communities,incontrastfeatureactorsthatarehighlysocializedandareworkingcollectivelyoninterdependenttaskstocreatesolutionstoinnovationproblems.

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boundarychoicesthanthetraditionaltopicsofassetspecificity,information

processing,orstrategic“coreness.”(seealsoGrandori,2001andNickersonand

Zenger,2004).Finally,wesuggestthatfirm‐centeredinnovationlogicis

fundamentallydifferentandinconsistentthanopeninnovationlogic,andthatopen

innovationlogicisincreasinglydominant.Ifso,ourtheoriesofinnovation,

organizationaldesign,andorganizationalchangemustcapturethetensions

betweenthesecontrastinginnovationmodes.

Ourpaperisorganizedasfollows:InSection2weanalyzeAppleanditsabilityto

alter(openandclose)itsboundariesacrossarangeofactivitiestobuildan

empiricalgroundingforourtheoreticalreconciliation.Section3outlinestheextant

andsometimesconflictingliteratureonfirmboundariesandthelocusofinnovation.

Section4thenbuildsonourAppleexampleandpresentsdriversofcomplex

boundariesbyillustratingthejointimpactofstrategictaskdecompositionand

distributedknowledgeforincumbentfirmsasdiverseasLEGOandNASA.Section5

inducesamodelofinnovationandcomplexorganizationalboundaries.Wesuggest

severalcorecontingenciesassociatedwiththefirm’sboundariesanddiscuss

implicationsoforganizingwhenfirmsmustattendtomultipleandinconsistent

innovationlogics.Finally,ourfinalsectionsuggestsimplicationsofcomplex

organizationalboundariesfortheorganizationtheory,strategy,andinnovation

literatures.

ComplexandDynamicBoundariesatApple

Allsystemintegratorcomputermanufacturers,likeApple,HewlettPackard(HP),

Lenovo,andDell,addressthefollowingfivedistincttechnicaldomainstoproduce

andsellacomputersystem:1)Hardware(themaincomponentbeingthe

processor);2)Operatingsystem(thesoftwarethatconvertsthehardwareintoa

functionalcomputationalmachine);3)Standards(themainhardwareandsoftware

specificationsthatallowforinteroperability);4)UserExperience(theapproachby

whichauserwillinteractwiththecomputer,includinguserinterface,lookandfeel

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andcommandstructures)and5)Applications(theadditionalsoftwarethatrunson

topoftheoperatingsystemsothatspecifictaskscanbeaccomplishedbytheuser).

Figure1laysoutthemaintechnicalproblemsaddressedbyPCmanufacturersby

locatingtheminamatrixcomprisedoftaskdecomposabilityandthedegreeof

knowledgedistribution.Forsimplicitypurposeswepresentabinarychoicefor

bothaxis,betweenhighandlowtaskdecomposition,i.e.modularandintegrated

tasks(seealsoNickersonandZenger,2004)intherowsandnarrowandbroad

knowledgedistributionforthecolumns.Thisresultsinarangeofboundarychoices

forfirmsfrominternaldevelopment,tocomplexintra‐firmstructures(eg

ambidextrousdesigns),toworkingwithpartnersand/orconsortia,toworkingwith

marketsorcommunities.

InFigure1,thelower‐leftquadrantshowsthetraditional,internallydriven

organizationalmodelforinnovation.Managersofthefirmdeterminethatthe

relativetaskdecompositionopportunitiesarelowandrequisiteproblemsolving

knowledgeareallwithinthefirmresultingininternallydevelopedinnovation.The

upper‐leftquadrantindicatesthatthefirmmanagershavebeenabletodecompose

innovationtasksinawaythatenablesexternalpartiestocontribute,howeverthe

knowledgerequiredtoaccomplishsuchtaskslieswithinastrategicpartner.The

lower‐rightquadrantindicatesthatwhiletaskdecompositionislow,thebenefitsof

havingseveralactorsparticipatinginthecreationofinnovations,viaaconsortium,

arehighenoughthattheincumbentfirmcanabsorbtheaddedcostofintegration.

Finally,theupper‐rightquadrantindicatesthatfirmmanagershaveenabledtask

decompositioninawaythatallowsmanymorepartiestojoin‐inbyrelyingon

eithermarketorcommunity‐basedapproaches.Thedistinctionbetweenusinga

marketoracommunityapproachtoinnovationisgroundedontherelativedegree

ofsocialrelationsandinterdependenceafirmhaswiththeexternalparties.

Marketsrelymostlyonformalcontractsandarms‐lengthrelationshipwith

suppliers,whilecommunitiesrequirethefirmtohaveemployeesparticipating

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heavilyandactivelyintheinnovationprocess(seeforexampleWestandO’Mahony,

2008).

Anambidextrousdesign,adesignthatbuildsinintra‐firmstructuralinconsistency

withstructurallinkages,isanappropriatedesignchoicewhenthereisstrategic

interdependenceaftertaskshavebeendecomposedandwherethereisknowledge

heterogeneityeitherwithinthefirmorwiththefirmandexternalactors(O’Reilly

andTushman,2008;Lavie,Kang,andRosenkopf,2011;RothaermelandAlexandre,

2009).Ambidextrousdesignsbuildinboundaryandstructuralheterogeneitysuch

thatthefirmcanoperatesimultaneouslyindistinctinnovationmodes.

Figure1showsthatatypicalPCfirminthe1990’schoseastrategyofproblem

decomposabilityacrossallthetechnicaldomains.MostvendorshadchosenIntel

and/orAMDassuppliersofthehardwaremicroprocessorandhadreliedon

MicrosoftWindowsfortheoperatingsystemandtheuserexperience.These

partnershipsallowedPCmanufacturerstoworkasintegratorsofthedominant

technologiesdevelopedbyIntelandMicrosoft.Thesupplyofapplicationswasleft

toanunregulatedmarketwhereanyactorcouldcreatesoftwareandselldirectlyto

users(seeFergusonandMorris,1993).Standardsforinteroperabilitywere

developedthroughvariousInstitutesforElectricalandElectronicEngineers(IEEE),

InternetEngineeringTaskForce(IETF)committeesandotherad‐hocorganizations

(forexampletheWiFistandard,theTCP/IPstandardandtheUSBstandard).

Incontrast,drivenbySteveJobs’strategicpointofview,Applefollowedan

integratedandinternalstrategyformostofitsPCstack(Isaacson,2011).Inthelate

1990sthehardwareusedbyApplewasbuiltincloseconsortiumbetweenIBMand

Motorolaandhadcreatedasoftwareoperatingsystemanduserinterfacethatwas

uniqueanddifferentfromtheMicrosoft/Windowsindustrystandard.Noonehad

therightstoeitheruseormodifytheintegratedcombinationofApple’shardware,

operatingsystemanduserinterfacestack.SimilartotherestofthePCindustry,

applicationsweredevelopedinanunregulatedmarketofdevelopers.Figure1

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illustratesthecontrastbetweenApple’sprimarilyintegrated–internaldevelopment

strategyandthepracticesofworkingondecomposabletaskswithpartnersinthe

restofthecomputerindustry.

However,bythelate1990s,Applewasinfinancialandtechnicaltrouble.The

Microsoft‐Intel‐basedplatformwassignificantlyoutperformingApplesystemsin

technicalandcostperformance.Applefailedtoupdateitsoperatingsystemto

modernrequirementsandmanyinthefinancialpresswerespeculatingthatfirm

wasinitslastthroes,asitwasmakinguninspiredandunderperforming“beige”

computingboxes.Applewasonthelosingsideofadominantdesignthatcomprised

Intel‐architecturehardwareandMicrosoftoriginatedoperatingsystem,user

interface,andcompatibleapplications(CusumanoandSelby,1995).

StrategicDecompositionoftheOperatingSystemandWorkingwithCommunities

IntheearlytomidninetiesApplebeganthreeindependentattemptstoupdateand

modernizeitscomputeroperatingsystems.Allthreeattemptsfailedduetolackof

appropriateprogrammingtalentandpoorexecutionofthevariousprojects.In

1996,Appledecidedthattheydidnothavetheinternalcapabilitytocompletely

inventanewoperatingsystemandrecommendedthatthenextversionofthe

operatingsystembeobtainedthroughanacquisitionofNeXTSoftware(the

companyJobsfoundedafterhewasoustedfromApplein1985).Applereleasedthe

opensourcecomponentsofitsoperatingsystemasaseparatesoftwaredistribution

called“Darwin”in2000.

TheNeXToperatingsystemitselfwasbasedontheMachkernel,developedat

CarnegieMellonUniversityasaresearchprojecttofurtheradvanceknowledgeof

operatingsystems,andontwoopensourcesoftwareprojects,FreeBSDandNetBSD,

thathavehadthousandsofcontributorsparticipateinthem.Applethustookthe

fruitsoftheopensourcecommunityandleverageditforitsownnextgeneration

operatingsystem,releasedin1999,OSX.Figure2(1)illustratestheintegrationof

theopensourcecommunityinApple’sproprietaryprocess.TheOSXoperating

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systemnowpowersallAppleproductsincludingpersonalcomputers,andtvand

mobiledevicesliketheiPhone,iPodTouchandiPad.NotethatAppledidnot

abandonitsownoperatingsystemdevelopmentefforts,rathersomeofthemodules

ofthesoftwarewerenowdevelopedinconcertwiththecommunityandsome

internally.

Appleacknowledgestheimportanceofopensourcecommunitiesinthiscoreaspect

oftheirproduct:

“AsthefirstmajorcomputercompanytomakeOpenSourcedevelopmentakeypartofits

ongoingsoftwarestrategy,AppleremainscommittedtotheOpenSourcedevelopment

model.MajorcomponentsofMacOSX,includingtheUNIXcore,aremadeavailableunder

Apple’sOpenSourcelicense,allowingdevelopersandstudentstoviewsourcecode,learn

fromitandsubmitsuggestionsandmodifications.Inaddition,Appleusessoftwarecreated

bytheOpenSourcecommunity,suchastheHTMLrenderingengineforSafari,andreturns

itsenhancementstothecommunity.

ApplebelievesthatusingOpenSourcemethodologymakesMacOSXamorerobust,secure

operatingsystem,asitscorecomponentshavebeensubjectedtothecrucibleofpeerreview

fordecades.Anyproblemsfoundwiththissoftwarecanbeimmediatelyidentifiedandfixed

byAppleandtheOpenSourcecommunity.”4

AnanalysisofApple’suseofopensourcewithintheOSXsystemrevealsthatover

500distinctcomponentsoftheoperatingsystemareusingopensourcecomponents

fromover180projects.ThuswhilethepopularperceptionofAppleastheparagon

ofproprietaryandclosedsoftwaredevelopment,itsinvolvementinanduseofopen

sourcerevealsamorenuancedapproachthatleveragesthedistributedknowledge

ofexternalopensourcecommunitiestoitsstrategicadvantage.

Atthesametime,whileopensourceworkswithinthecoreoftheoperatingsystem,

thekeyelementsoftheuserinterfaceandtheuserinteractionmodelare

4http://www.apple.com/opensource/

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proprietaryandremainunderApple’sstrictpurviewandoversight.Indeedthe

DarwinoperatingsystemcannotrunmostoftheMacintoshOSXapplicationsasit

doesnothaveaccesstoApple’sproprietarygraphicaluserinterface,rendering

libraries,orengine.Applehasbeenabletoseparatethetechnicalproblemsthatare

coretoitssuccess(butinvisibletoitsusers)andhaspursuedanopenboundary

approachinthatarea.Insharpcontrast,inareasthatrequiredirectconsumer

interactionthatdifferentiatesApplefromMicrosoft,Applemadeproprietaryand

closedinvestmentsintechnologiesanddesignsthatitdoesnotmakeavailableto

anyoneelse.

Apple’sstrategicdecompositionoftheoperatingsystemenablesitto

simultaneouslyuseopenandclosedboundariesforitsstrategictasks.Thisattention

tostrategicboundarymanagementhasenabledAppletoreleaseanewversionof

theoperatingsystemeveryonetotwoyears.Theuseofopenboundarieshasa

significantcostadvantageasasignificantportionofApple’soperatingsystem

softwareiscontinuouslyimprovedbyindividualsoutsidethefirm.Those

incrementalresourcesaredevotedtoinnovateonitscoretasksofuserexperience.

SimultaneousDecompositionandRe‐integration

Apple’sactionsaroundthecomputerprocessorforitsvariousproductsindicatea

sophisticatedunderstandingofmanagingfirmboundariestomeetstrategic

objectives.Upto2005,ApplehadreliedonthePowerPCchiparchitecturefor

microprocessorswithinitscomputerline.ThePowerPCalliancewasajoint

technologyventurebetweenIBM,AppleandMotorolatocreatechipsthatwould

competeagainstIntelprocessorsforarangeofcomputerapplications.Ineffect

Appleanditspartnerswereinthecustomchipdesignbusinessagainstacompetitor

thathadmorethan20timesitsvolume.

Intheearly2000s,ApplediscoveredthatitsPowerPCpartnershipwasnotkeeping

upwiththetechnologicalrequirementsneededtostaycompetitive.Thisprompted

thefirmtoexitthePowerPCconsortiumandtoenterintoaspecialpartnershipwith

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InteltoincorporateitsstandardchipdesignintoApple’scomputingplatform.In

thiscaseAppledevolvedtheadvantagesofverticalintegrationforthebenefitsof

workingwithintheframeworkofIntel’sdominantdesign.Applecustomerswere

notpurchasingitsproductsforitsmicroprocessor–butinsteadwantedaccesstothe

proprietaryAppleoperatingsystemanduserinterface.AslongasthechipsbyIntel

keptupwiththestandardsincomputingtherewasnostrategicreasonforAppleto

beengagedinactivitiesinchipdesignandmanufacturing.HenceApple

decomposedtheinnovationtasksrelatedtohardwaretoanexternalpartner(Figure

2(2)).5

Incontrast,inmobiledevices,Appledecidedtorejecttheprevalentdominantchip

designofthemobile‐ARMarchitectureandinsteadinvestedinacquiringseveral

firmsthatenabledAppletodesignitsowncustomchips.Inthiscasethelogicof

followingthedominantdesignviadecompositionisreversed.InApple’s

assessment,thetechnicalperformancecriteriaformobilechipsarestrategically

core.Assuch,therewasastrategiclogictohaveaproprietaryapproachthat

minimizespowerconsumptionandmaximizesspeedandresponsiveness

customizedtoitsowndevice.Apple’sassessmentofthetechnologicalfrontierin

mobilechipswasthatadoptingthedominantdesignwouldnotprovidestrategic

benefitstothefirm.Adoptingthisstandardwouldinsteadallowitscompetitorsto

achievesimilarperformanceoutputsandclaimparityinperformanceinmobile

devices.AlloftherecentApplemobilecomputingdevicesnowhavethiscustom

chiptechnology(Figure2(3)).

Thesimultaneousacceptanceofdominantdesigninmicroprocessorsforcomputers

andtherejectionofthedominantdesignformobileapplicationsillustratethe

linkagesbetweenchoicesoftaskdecompositionandthefirm’sboundary.These

5Gilson,SabelandScott(2009)provideaninterestingperspectiveonApple’sjourneyinmanufacturingoutsourcingbyfocusingonitsdecisiontosellitslogicboardmanufacturingplanttoSCIcombinedwithapartspurchasecontractandacollaborativeinnovationagreement.

16

examplesalsoillustratesthatadoptionofadominantdesigniscontingentonfirm’s

strategyandtheshiftingbasisofcompetition.Apple’sabilitytoalteritsboundaries

atthesecriticaljuncturesillustratesthatthelocusofinnovationshiftsarebasednot

justonalogicofcostminimization–butalsoaccesstoknowledgethatprovides

competitiveadvantage.

Figure2providesafullaccountingofApple’scurrentstageofboundariesinthe

variousaspectsofitsbusiness.ThefigureshowsthatApplehasbeenableto

continuouslyshiftboundariestosuitstrategic,technical,andcompetitiveneeds.

Theseexamplesillustrateinnovationstreamsovertimewitheachinnovation

associatedwithitsownsetofboundarydynamics.Theseinnovationpatternshave

thequalityofshiftingfirmboundariesfromintegrated,intrafirmboundariestoever

morecomplexintraandextrafirmboundaries.Thesesetoffirmboundariesinclude

intrafirmdifferentiation,externalpartners,consortia,aswellasleveraging

open/peerinnovation.Theseboundarychoicesareassociatedwithstrategic

decisionsastowhethertheproductisdecomposableorisinherentlyintegrated(at

apointintime)aswellasthelocusofsolutionknowledge.Applekeepsintegrated

productswithinitscontrolandhierarchy,whileithasexploredmorecomplex

boundaryrelationsforcomponentsthatcanbedecomposedandwhosesolution

knowledgeiswidelydistributed.

NotethatAppleemployedthesecomplexanddynamicboundariesinthecontextof

performancecrisesassociatedwithitspriorsimplisticapproachtoboundary

management.Theseorganizationalshiftswere,inturn,associatedwiththe

transformationofAppleasafirm.Suchcomplexsetsofboundarytypesand

boundaryrelationstriggeredsignificantidentity,governance,IP,andassociated

leadershipissueswithinApple(Isaacson,2011).Inparticular,Apple’s

organizationaldesignevolvedsuchthatitcouldsimultaneouslyattendtothe

complexchallengeofholdingsomeinnovationwithinthefirm’scontrolwhileother

innovationwasexecutedwithcommunitiesofactorsoutsideAppleand,inthe

extreme,withanonymouscontributors.

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InnovationandFirmBoundaries:TheControlofCriticalContingencies

SinceSchumpeter(1947),Barnard(1938),Chandler(1962),andMyersand

Marquis(1969),scholarshaveemphasizedinnovationasasourceofafirm’s

competitiveadvantage.Innovationandassociatedstreamsofinnovationareone

routetosustainedperformance(egO’ReillyandTushman,2008).Muchoftheearly

innovationworkwasrootedinR&Dinvestments,thebuildingofR&Dcapabilities,

andtheassociatedspecializedassetsassociatedwiththeinvention,patenting,and

executionofportfoliosofinnovations(egDoughertyandHeller,1994;Allen,1977;

ClarkandFujimoto,1991;CohenandLevinthal,1990;Fleming,2001;Doughetry

andDunne,2011).

Thereisextensiveliteratureondesigningorganizationstocreatestreamsof

innovations.Inaworldofuncertaintyandassetspecificinvestments,transactions

costslogicarguesthatfirmswithtightboundariesoutperformmarketsinthe

productionofinnovativeoutcomes(egWilliamson,1975,1981;Knott,2001).

Similarly,theknowledge‐basedviewofthefirmsuggeststhatwhenproductsor

servicesarecomplexandnon‐decomposable,thefirmoutperformsmarket

mechanisms(egNickersonandZenger,2004;KogutandZander,1996;Grandori,

2001).InsuchMorUformfirms,authorityisvestedwithseniorleaderswhocreate

structures,processes,capabilities,cultures,andinformationprocessingcapabilities

suchthatfirmsgainthebenefitsofspecializationaswellasintegration(egNonaka

andTakeuchi,1995;TushmanandNadler,1978).

Inasimilarspirit,theresourcedependencyliteratureisrootedinalogicwherethe

boundariesofthefirmareestablishedtomaximizethecontrolofcritical

contingencies.Forthosecontingenciesthatarenotinternalized,thefirmactsto

minimizedependenceon,gaincontrolof,co‐opt,ornegotiatewithcriticalexternal

actors(Aldrich,2008;PfefferandSalancik,1978;DavisandGreve,1997).This

designliteraturewithitsfirmfocusandefficiencylogicisassociatedwithspecifying

18

thefirm’sformalboundariesaswellasitspower,competencies,andidentity

boundaries(SantosandEisenhardt,2005).

Researchonthesociologyofinnovationandtechnicalchangesuggeststhatnew

marketsopenwithaburstoftechnicalvariantscompetingfordominance.Thisera

oftechnicalfermentendswiththeclosingofindustrystandardsordominant

designs(egTushmanandRosenkopf,1992;Rao,1994;AbernathyandUtterback,

1978).Forexampletheautomobileengine(Abernathy,1978;Rao,1994),power

system(Hughes,1983),watch(Landes,1983),chemicalanddye(Murmann,2003),

diskdrive(Christensen,1997),andflightsimulator(Rosenkopf,Metiu,andGeorge,

2001)industrieswereinitiatedbyperiodsoftechnologicalvariability.Duringthese

erasofferment,integratedproductscompeteforbothtechnicalandmarket

dominance(AndersonandTushman,1990).Suchperiodsofuncertaintyareclosed

asdominantdesignsemergeeitherbycompetitiveselection,coalition,orlaw(see

MurmannandFrenken,2006;Suarez,2004).

Onceadominantdesignemerges,thenatureofinnovationshiftstotheproducts’

components,processinnovationbecomesmoreintense,andproductinnovation

becomesmoreincremental(seeRosenkopfandTushman,1998;Rao,1994;

Murmann,2003).Erasofincrementalchangeareassociatedwithashakeoutinthe

productclassandincreasessizeandscaleofthosefirmsassociatedwiththe

industrystandard(egJenkinsandChandler,1975;AndersonandTushman,2001;

Wise,1985).Theseerasofincrementalchangeare,inturn,aredisruptedby

subsequenttechnologicaldiscontinuitieswhichtriggerasubsequenttechnological

cycle(TushmanandAnderson,1986;TushmanandMurmann,1998).Thereare

profoundtaskandorganizational/boundaryimplicationstothesetechnologycycles.

Duringerasofferment,integratedfirmswithorganicstructuresarebetterat

exploration,whileduringerasofincrementalchange,moremechanisticstructures

arebetteratexploitingagiventechnicaltrajectory(egAbernathy,1978;Lawrence

andLorsch,1967;March,1991).

19

Atthesetransitions,whenfirmsshiftfromintegratedinnovationtomodularor

decomposedinnovation,firmsalsoshifttomoreintenseprocessinnovationand

growinscale.Thesepunctuatedchangesareassociatedwithhigherlevelsofboth

boundarydifferentiationaswellasmoreextensivestructuralandcultural

integration(egRomanelliandTushman,1994;VandeVen,Angle,andPoole,1989;

Schoohoven,Eisenhardt,andLyman,1990).Finally,forincumbentsthatsurvive

thesedynamics,thenextwaveofvariation,selection,andretentionareexecuted

througharangeofboundaryexpandingmechanismsincludingambidextrous

structures,alliances,orjointventures(egGulati,1995;LavieandRosenkopf,2006;

Tushman,Smith,Wood,Westerman,andO’Reilly,2010).

Theliteratureonmanaginginnovationstreamshasafocalfirmasitsunitofanalysis

(orinsomecasestheproductclass)andhasbuiltanextensiveliteratureonthe

architectures,structures,cultures,linkingmechanisms,alliances,andgovernance

modesassociatedwithfirmsthatcanexploitaswellasexplorewithinthefirmas

wellaswithselectedpartners(egO’ReillyandTushman,2008;AgarwalandHelfat,

2009;LavieandRosenkopf,2006;Helfatetal,2007).Suchcomplicateddesignsto

executeinnovationstreamsalsoareassociatedwithdistinctiveidentitiesthat

permitcontradictoryarchitecturesandtheirassociatedcomplexboundariesto

coexist(Gioa,Schultz,andCorley,2000).

Thisinnovationanddesignliteraturehasalogicwherethefocalfirminternalizes

thoseaspectsoftheinnovationthatarecoretoitsstrategyevenasitbuildscomplex

boundariesandinternallycontradictoryarchitecturestoexploreandexploit.For

example,asCibaVisionextendeditsinnovationbeyondincrementalinnovationin

conventionallens(withinCibaVision’sextantorganization)toincludedaily

disposableandextendedwearlenses(viaanambidextrousdesign),aswellasanage

relatedmaculardegenerationproduct(executedincollaborationwithanAustralian

partner).Thesesetofcomplexstructuresandassociatedboundariesweremanaged

bytheseniorteamanchoredwithCibaVision’sidentityasafirmdedicatedto

‘healthyeyesforlife”(Tushmanetal,2010).Thedrivingimpulseinthisliteratureon

20

innovationandorganizationboundaries/designhasbeenthecontrolorbufferingof

thefirm’scontextthroughcomplexboundaryselectionandmanagement.

InnovationandOpenBoundaries:TheFirmintheContextofDistributedInnovation

Incontextswherecomputationalcostsarelowandwidelyavailableandwhere

distributedcommunicationisinexpensive,openorpeerinnovationcommunities

displacesorganization‐basedinnovation(BaldwinandvonHippel,2011).Inthese

contexts,communitiesofpeersspontaneouslyemergetofreelyshareinformation

oninnovationproductionaswellasproblemsolving.Suchradicallydecentralized,

cooperative,self‐organizingmodesofproblemsolvingandproductionareinsharp

contrasttoorganizationallycenteredinnovation(LakhaniandvonHippel,2003;

MurrayandO’Mahony,2007;vonHippel,2005;vonHippelandvonKrogh,2003)

Openinnovationismostclearlyseeninopensourcesoftwaredevelopment.Open

sourcesoftwaredevelopmentdependsonmanyindividualscontributingtheirtime,

forfree,toacommonproject.Legally,participantsretaincopyrightsfortheir

contributionsbutthenlicensethemtoanyoneatnocost(seeBenkler,2006for

moredetail).Theseself‐organizedcommunitiesdeveloptheirownemergentsocial

structure(egO’MahonyandFerraro,2007;FlemingandWaguespack,2007).Such

communitiesofdevelopersrelyontheavailabilityofeasycommunication,the

modularityoftheproject,andintrinsicmotivation.Thisopensoftwareinnovation

regimecreatesrobustproductsandisequivalenttoprivatemarketsoftware

developmentmethodsinfeatures,functionalityandquality(Raymond,1999;

Benkler,2006,LernerandSchankerman,2010).

Community‐basedinnovationisnotlimitedtosoftwaredevelopment.Peermodesof

innovation,whereactorsfreelyshareandco‐createinnovationhavebeen

documentedinarangeofproductdomains.Forexample,VonHippelandhis

colleagueshavedocumentedpeer(oruser)innovationinheart‐lungmachines,gas

chromatography,mountainbikes,andinmanyotherproducts(vonHippel,2005;

FrankeandShah,2003).Ineachoftheseexamples,usercommunities

21

spontaneouslyemergetocreatenewmarkets.Oncetheproductisdeveloped,only

thendoincumbentsenterandshiftthenatureofinnovationtocostandscale.

Whilecommunitiesareassociatedwiththecreationofnewmarketsandthe

adjudicationofuncertaintyduringtheassociatederasofferment,autonomous

problemsolvingalsooccursthroughprizeandcontest‐basedmechanismsthat

allowforfree‐entrybutemphasizecompetitionamongstpeers.Perhapsthemost

famousearlyexampleofinnovationcontestsistheBritishgovernment’scontestto

findawaytoaccuratelygaugelongitudeatsea(Sobel,1995).Whilecontestsare

associatedwithprizes,theprizesareoftenrelativelysmallandmostproblem

solversdonotwin.Yetanalysesofthesetournamentsettingsreveallarge‐scale

entryintotournaments,farabovepredictionsfromaneconomicsperspective(Che

andGale,2003;Boudreauetal2011).Thisextensiveexternalparticipationindicates

thepresenceofcomplexintrinsicandextrinsicmotivations(BoudreauandLakhani

2009,JeppesenandLakhani2010,Boudreauetal2011).

Bothcommunity‐andcontest‐basedproblemsolversaremotivatedbya

heterogeneousblendofintrinsicandextrinsicmotivationsandtheemergentsocial

propertiesofinteractionsinonlinesettings(LakhaniandWolf,2005;Flemingand

Waguespack,2007,GulleyandLakhani,2010,Boudreauetal2011).Whenthe

problemsaremodularinnature,thesecommunitieshavehaddramaticimpacton

problemsolvingoutcomes(seeKogutandMetiu,2001;LakhaniandvonHippel,

2003).Theseanonymouscommunitiesareself‐motivated,selfselected,andself

governed(vonKroghetal2003;Boudreauetal,2011;DahlanderandGann,2010).

Intheseanonymouscontexts,self‐selectiondrivesbothparticipationandeffort(von

Kroghetal2003;BoudreauandLakhani2009).Forexample,atLEGO,the

Mindstormrobotkitbecamesuccessfulonlyafterthefirmopeneditsboundariesto

permitacommittedsetofusestoindependentlydeveloparangeofMindstorm

products(seeHatchandSchultz,2010).

22

Itappearsthattheavailabilityofinexpensivecomputationpowerandeaseof

communicationpermitsafundamentallydifferentformofinnovation;amodeof

innovationthatisrootedinsharingandopennessfreeofformalboundariesand

formalhierarchy.Ifso,thesenon‐market,peerinnovationmethodspromiseto

complementandundersomeconditions,displacefirmcenteredinnovationmodels

(egWikipedia’ssubstitutionforEncartaandEncyclopediaBritannica).For

incumbentfirms,communitybasedinnovationmodesstandinsharpcontrastto

theirhistoricallyanchoredorganizational‐based,controlorientedinnovation

modes.

Totheextentthatmarketandnon‐marketinnovationmodesarecomplements,

firmsbuildmultipleandcontrastinginnovationregimesinserviceofinnovation

streams(O’ReillyandTushman,2008;vonHippelandvonKrogh,2003).Such

paradoxical,internallyinconsistentinnovationmodesrequire,inturn,

organizationaldesigns,complexboundaries,andseniorteamattentiontosuch

contrastingrequirements(SmithandLewis,2011;AndriopoulosandLewis,2009).

Incontrast,ifthesedistributedcommunitiesdominateincumbentsatnewproduct/

creationandareeffectiveinmodularproblemsolving,thesecommunitieswill

displacethetraditionalfirminkeydomainsoftheinnovationsystem.

SolutionGenerationandSelectionKnowledgeandLocusofInnovation

Underwhatconditionsdothesevariousinnovationmodesdominate?Kingand

Lakhani(2011)developaframeworktoreconcilethecoexistenceofvariousmodes

oforganizinginnovationfrominternaldevelopment,tomarketsusingvotingand

approvalcontestsandprizesandtournaments,andtocommunities.Buildingon

Campbell’s(1969)evolutionaryconcepts,theyarguethatthecentraltasksin

organizingforinnovationaretwoknowledge‐basedactivities:1)Generatingarange

ofsolutionstoaninnovationproblemand;2)Selectingtheappropriatesolution(s)

fromthemyriadofalternativesavailable(TerwieschandUlrich,2009).

23

Basedonthisvariationandselectionapproachtoinnovation(seealsoVincenti,

1994;MurmannandFrenken,2006),KingandLakhani(2011)developa

knowledge‐basedapproachtothelocusofinnovation(seealsoNickersonand

Zenger,2004;Grandori,2001).Iftheknowledgeneededtoaccomplisheither

knowledgegenerationorselectionisnarrowlyheldinthefirm,theassociated

innovationboundarieswillbefundamentallydifferentthanwhenknowledgeis

morewidelydistributedamongstmanyexternalactorsanddisciplines.Themore

eithersolutiongenerationorselectionknowledgeisbroadlyheld,thegreateruseof

openboundaries.Incontrast,totheextentthateithersolutionorselection

knowledgeisnarrowlyconcentratedinthefirm,themoreinternalboundaries

dominate(seeFigure3).6

Thedistributionofknowledgeforsolutionsearchandselectiondrivethedegreeof

opennessincumbentsfaceinorganizingforinnovation(KingandLakhani,2011).

Forthoseinnovationswheretheknowledgeneededtobothgeneratealternative

solutionsandtoselectamongstthemisconcentratedwithinthefirm,traditional

intra‐firmorganizingdominates(egApple’sinternalmanagementoftheuser

interface).Forthoseinnovationswheresolutiongenerationisnarrowlyheldbut

whereselectionknowledgeisbroadlydistributed,thevotingorapprovalcontests

dominate.Insuchcontexts,thechoicesofmanyconvergetotheappropriate

selection(thesefollowthe“wisdomofcrowds”approach(Surowiecki,2005).For

exampleintheworldoffashionsomefirmslikeZaraandModcloth.comengage

customerstodeterminedemandandassociatedproductionruns(seealsoCappetta,

Cillo,andPonti,2006).

Forthoseinnovationswheresolutionknowledgeiswidelydistributedbutwhere

selectionknowledgeisconcentrated,innovationcontestsandtournaments

6NotethatincontrasttoFigure2,KingandLakhanidonotexplicitlyconcernthemselveswithtaskdecomposition,insteadtheyfocusonthedistributionofknowledgeforboththegenerationandselectionofinnovations.

24

dominate(forexample,NASA’suseoftournamentstosolvecoretechnical

challenges).Organizationsinthisquadrantmaysponsortheirowntournamentsor

choosetoworkwithexternalplatformslikeInnoCentiveorTopCoder(Boudreau

andLakhani,2009).Finally,whenboththeknowledgetocreatesolutionsandselect

amongstthemiswidelydistributed,thelocusofinnovationshiftsfromthefirmto

firmscollaboratingwithopencommunities(example:opensourcesoftware)andor

creatingfullyindependentmarkets(example:Apple’sApplicationStore).

Astasksbecomemoremodular(ordecomposable)andassolutionanduse

knowledgeismorewidelydistributed,thelocusofinnovationshiftstoopen

communities.Ifso,thenatureoftheincumbent’sidentity,itsstructures,associated

boundaries,culture,andincentivescannotberootedintheoryandresearch

anchoredoncost,control,andextrinsicincentivepremises.Aninnovationmodel

basedontraditionalfirmandmoreopenassumptionsrequiresatheoryofwhenand

underwhatconditionsdifferenttypesofboundariesareassociatedwithinnovative

outcomes.Further,ifdynamiccapabilitiesarerootedinmultipletypesofinnovation

executedsimultaneously,wemustbuildatheoryofthefirmthatcanhandle

complexboundaries,organizationaldesigns,andassociatedcomplexidentities(see

alsoMurrayandO’Mahony,2007;PrattandForeman,2000;SantosandEisenhardt,

2005).

DriversofDynamicBoundariesinIncumbentFirms

Coretoourperspectiveonthelocusofinnovationandcomplexorganizational

boundariesistheabilityofseniorexecutivestoengageinstrategictask

decomposition(orre‐integration)basedontheirfirm’sshiftingcompetitivecontext.

TheAppleexampleprovidedanillustrationofafirmtakingadvantageofthe

advancesintaskmodularityinitsindustry,and,inturn,accessingdistributed

knowledgebyopening(andclosing)itsboundariestoexternalactors.Buildingon

ourAppleexample,weexaminetheresponseofLEGOtocommunitytoy

developmentandNASA’sspacelifescienceslaboratorytoopeninnovation.Weuse

25

thesesetofthreeexamplestoinduceacontingentmodelofcomplexorganizational

boundaries,locusofinnovation,andinnovationoutcomes.

LEGO

TheexperienceoftheLEGOGroupwithcomplexboundariesandinnovation

illustrateshowanorganizationstumbledintotheadvantagesofdecompositionand

distributedknowledgeandthenlearnedtoeffectivelyusethiscapabilityfor

subsequentinnovationefforts.Foundedin1932tomaketoysforchildren,themain

productlineofthefirmsince1949hasbeentheplasticbricksthatenablecreative

playandimaginationamongstkidsaroundtheworld.The“bricks”businessat

LEGOhasbeentraditionallyorganizedwiththefirmhavingcorecompetencein

boththemanufacturingprocess(extremelyhigh‐toleranceplasticinjection

moldings)andthecreationofvariousthemesandsceneswhicharesoldaspre‐

packagedplaysets,alongwith“raw”bricksintoystoresaroundtheworld.

TheriseoftheInternethashadaprofoundimpactonLEGO.Asextensively

documentedbyAntorini(2007),LEGO,initiallyunbeknownsttocompanyand

outsideoftheircontrol,attractedlegionsofadultfans,theso‐calledAdultFansof

LEGO(AFOL).Theseengagedusersself‐organizedintovariousonlinecommunities

andsharedknowledgeoncreativedesignsanduseofbricksforasetofcomplicated

projects.Thesecommunitiesofpassionatefansnotonlywrappedtheirpersonal

identityaroundAFOL,butalsoinnovatedintheclassicuserinnovationsenseby

modifyingandextendingtheoriginalbricks,inventingnewbricks,anddeveloping

newdesigns(egVonHipple,1988).Thecommunitywentasfarascreatingan

onlinesoftwaretoolkitwherebothdesignsfornewbricksaswellasnewLEGO

inspiredcreationsweremodeledandshared.Builtjustlikeanopensource

community,theAFOLmembersopenlyshareddesigns,tools,andtechniquesto

collectivelyenhancetheirexperiencewithLEGObricks(SeeFigure4(1)).LEGO

executivesinitiallyconsideredtheseusercommunitiesaminor“shadowmarket”

26

(HatchandSchultz2010)anddidnotengagewiththesecommunitiesina

meaningfulmanner.

In1998Legoreleasedabrick‐basedroboticskitcalledLEGOMindstormsaimed

primarilyatchildren.Thekit,withits727parts,enabledabuddingLEGOchildto

createandprogramrobotsthatcouldperformvarioustasks.Thekitwasmeantto

introducechildrentotheprinciplesofbothroboticsandcomputerprogramming.

However,withinweeksofthereleaseoftheMindstormskit,adultrobotics

enthusiastsdiscoveredthatthesekitswereeasytouseroboticskits.Oneofthem,a

Stanforduniversitygraduatestudent,KekoaProudfoot,withinmonthsofthe

release,reverseengineeredthekitandreleasedtotheInternetallhisdetailed

findingsincludingtheunderlyingsoftwarefortherobot’soperations.

Thesoftwarereleaseanditsdisclosure(againstLEGO’sintellectualproperty

license),ledtoaburgeoningonlinecommunitythatcreatedtheirownMindstorm

programmingkits.Thesekitsincludedthecreationofcustomandmoreuser‐

friendlysoftwarelanguageandanopensourceoperatingsystemtooperatethe

Mindstormsbricks(LegOS).Soonthereweremoreengineersandsoftware

developersworkingonMindstormdevelopmentoutsideofthefirmtheninside.

WithinLEGOthereweredivergentopinionsabouthowtodealwithexternal

communitiesinnovating,withoutpermission,ontheirproducts.Asdescribedby

Koerner(2006)7:

“Lego'sDanishbraintrustsoonrealizedthattheirproprietarycodewaslooseontheInternetanddebatedhowbesttohandlethehackers."Wehaveaprettyeagerlegalteam,andprotectingourIPisveryhighonitsagenda,"Nippersays.SomeLegoexecutivesworriedthatthehackersmightcannibalizethemarketforfutureMindstormsaccessoriesorconfusepotentialcustomerslookingforauthorizedLegoproducts.Afterafewmonthsofwait‐and‐see,Legoconcludedthatlimitingcreativitywascontrarytoitsmissionofencouragingexplorationandingenuity.Besides,thehackerswereprovidingavaluableservice."We

7http://www.wired.com/wired/archive/14.02/lego_pr.html

27

cametounderstandthatthisisagreatwaytomaketheproductmoreexciting,"Nippersays."It'satotallydifferentbusinessparadigm‐althoughtheydon'tgetpaidforit,theyenhancetheexperienceyoucanhavewiththebasicMindstormsset."Ratherthansendoutceaseanddesistletters,Legodecidedtoletthemoddersflourish;itevenwrotea"righttohack"intotheMindstormssoftwarelicense,givinghobbyistsexplicitpermissiontolettheirimaginationsrunwild.”

LEGO’sdecisiontoallowcommunityinnovationtoflourishresultedinthe

establishmentofdozensofsitesdevotedtosharingthird‐partyroboticsprograms

thatbuiltsystemslikesodamachinesandblackjackdealersandthecreationofnew

sensorandcapabilitiesthatwerewellbeyondtheoriginalkit.Over40guidebooks

werewrittentohelpusersextendthecapabilityoftheMindstormskits.Justlikethe

AFOL,LEGOexecutivesfollowedabenignneglectstrategywiththesecommunities,

allowingthemtoexistbutnotimpactingtheirowninternaldirection(SeeFigure

4(2)).

In2004,LEGOrealizedthatitsexternalcommunityhaddonemoretoaddvalueto

Legothentheirowninternaleffortsanddecidedtoformallyintegratekeyexternal

contributorsforthereleaseofMindstormsNXT(Koerner2006).Initiallylimitedto

fourcommunitymemberswithexpertiseinsensorsandsoftware,theMindstorms

UserPanel(MUP)closelycollaboratedwithLEGOR&Dtoimprovethenextrelease

oftheproduct.TheMUPmembersprovidedrapidfeedbackonarangeoftechnical

andmarketissuesandfurthersuggestednewfeaturesandconfigurationthatwould

maketheuserexperiencestandout:

“OncetheMUPerssignedon,theysentnumeroussuggestionstoLund(theLEGOManagerresponsibleforNXT)andhisteam.Theexecutivesrespondedwithappealsforfeedbackonplannedimprovements."Wewouldaskthemaboutaplannedfeature,"Lundsays,"andwithinhalfanhour,therewouldbeafour‐pageemailonit."TheLegoteamwaseagertopiggybackontheworkMUPmembershadalreadydone.RalphHempel,forexample,isrenownedforwritingpbForth,apowerful,Mac/Linux‐compatibleversionoftheRCXbrick'sfirm‐ware.LegowasparticularlywowedbythecraftsmanshipofJohnBarnes,theownerofHiTechnic,whichmanufacturesanultrasonicrangesensor,acriticaladd‐onthatallowsrobotstosensewhenanobstacleisapproaching."Theysaid,'Wereallylikeyourultrasonicsensor‐wouldyou

28

mindifwestartedmakingthis?'"Barnesrecalls."Isaid,'Goahead.Ihaveawholelistofsensorstogetstartedon.'”

LEGOthendecidedtofurtherincreasethenumberofMUPmemberstoover100

participantsandcreditstheirinvolvementinthesuccessfullaunchoftheNXT

program(HatchandSchultz2010),seeFigure4(3).

WhileLEGOwaspushedintosupportingcommunity‐basedinnovationwiththe

Mindstormsexperience,thefirmhasnowembracedthisopeninnovationmode

throughoutitscustomer‐facingoperations.LEGOhasestablishedanambassadors

programthatselects75individualsfromitsusercommunitiestoworkhand‐in‐

handwithLEGOstaffonarangeofinnovationandproductdevelopmentissues.The

firmhasalsocreatedatoolkit(calledtheLEGOFactory)thatenablesanyoneto

createacustomorderforLEGObricksfortheiruniquedesigns(vonHippeland

Katz,2002).Customers,usingthesoftwareprovidedbyLEGO,nowcreateelaborate

designsontheircomputersandthenusetheirdesignstopurchasetheexactamount

andtypeofbricksneededtoexecutetheirdesign.Inadditionuserscanuploadtheir

designsandfilesforotheruserstocreatetheirowncustomorders.LEGOisalso

experimentingwithhavingusersshowcasetheircustomdesignsandthencreatean

abilitytosellthemtootherinterestedusers(seeFigure4(4)).

Moregenerally,LEGOhasintegratedcommunitiesinsideofitsmajorproductlines

sothatitsuserscanshowcasetheirtalentsandcreationsthroughtheLEGOsite.

TheseactivitiesarenowpartofLEGO’snewbusinessunit,Community,Education

andDirect(CED),whichcontribute15%ofrevenuesandisgrowingtwiceasfastas

thelargerLEGOGroup(HatchandSchulz2010).Thisshifttothesemorecomplex

boundariesatLEGO,managinginnovationthroughinternalaswellasopen

mechanisms,wasnoteasytoexecute.Theseshiftsinmanaginginnovationwere

onlyexecutedundercrisisconditionsandunderanew,externallyrecruited

leadershipteam.ThisnewseniorteamtransformedLEGObybroadeningits

innovationmechanismstoincludecomplexintrafirmstructuresaswellasopen

29

innovation.Thisuseofcomplexorganizationalboundariesinserviceofinnovation

streamswascoupled,inturn,withtransformationalorganizationchangesinLEGO’s

vision,identity,culture,structures,andcompetencies(HatchandSchultz,2010).

NASA;SpaceLifeSciences

Onthesurface,spacesciencesrepresenttheultimateincompletelyvertically

integratedprogramswhereallelementsaredoneinternally.TheNational

AeronauticalandAstronomicalAgency(NASA)hashadthemonopolyoncivilian

spacetravelformorethanthepast50years.Historicallythespaceagencyhas

workedincloseconnectionwithselectandeliteaerospace/defensecontractorsfor

thejointdevelopmentofspacevehiclesandprograms.NASAcontractorsessentially

actasinternalemployeesoftheagencyandarecloselyintegratedintoitsinnovation

anddecisionmakingactivities.

Since2008,NASA’sSpaceLifeScienceDirectorate(SLSD)haslaunchedaseriesof

pilotprojectstoexamineifcommunityandmarket‐basedmodelsofinnovation

developmentmightfeasiblybeappliedtoavarietyoftechnicalchallengesthathave

traditionallybeenmanagedinternallyorwithtraditionalsuppliers.Centraltothis

approachhasbeensignificanteffortbySLSDinnovationmanagementtodetermine

whichtasksareamenableforsearchandsolvingbyexternalproviders.Inessence

SLSDstaffhavebeenworkingondecompositionofpreviouslyintegratedproblems

intochallengesthatcouldbeputouttotherestoftheworldforsolving.

During2009‐2010,SLSDinitiatedthreepilotprojectswithleadingopeninnovation

platforms(InnoCentive,TopCoder,Yet2.com)toconnectNASAproblemswith

worldwideproblemsolvingcommunities.WorldwideengagementinNASA

problemswasextremelyhigh.ThesevenproblemspostedonInnoCentiveengaged

over2900problemsolversfrom80countriesandyieldedsolutionsfrom347

individuals.Onaverageeachproblemhad49independentsolutionsubmissions.

Previouslyintractableinnovationissueslikeforecastingofsolarevents,improved

foodbarrierlayers,andcompactaerobicresistivedevicedesignswererapidly

30

resolvedbytheseanonymouscommunities.Forexample,thedevelopmentofthe

spacemedicalkitplanningalgorithmengaged480individualsfrom60countriesto

submit5000solutionsover10daysresultingintheidentificationofnewmethodsto

beincludedintheNASAflightplanningsystem.

Similarly,NASA’sexperiencewiththeforecastingofthesolareventsindicateshow

openinnovationcansubstitutefortraditionallyfirmbasedinnovationapproaches.

Unexpectedsolarflareswreakhavoconspaceequipmentandaredangeroustothe

healthofastronautsinorbit.Sincethestartofthespaceprogram,NASAhas

investedsignificantfinancialandintellectualresourcestowardsthedevelopmentof

betterflareforecasts.Afteryearsofinvestment,thebestalgorithmsachieveda55%

predictionaccuracy,slightlybetterthantossingacoin.NASAdecidedthatthis

challengewouldbesuitableforcommunityproblemsolving.Workingwith

InnoCentive,NASAengineersdevelopedaproblemstatementthatsufficiently

describedtherequiredinnovationinawaythattransformedtheproblemfromone

ofhelio‐physicstoageneralcomputationaldevelopment.Thechallengewasposted

onInnoCentiveandhadarewardamountof$30,000.Inathreemonthtimeperiod

over500individualsexpressedinterestintryingtosolvetheproblemby

downloadingtheproblemstatementandsigningthesolveragreement.Attheclose

ofthecontest11individualssubmittedsolutions.Thewinningsolutioncamefroma

retiredtelecommunicationsengineer.Usingonlyground‐basedequipmentinstead

ofthetraditionaluseoforbitingspacecraft,thisalgorithmimprovedforecasting

accuracyto85%.

TheseextraordinarydistributedinnovationoutcomespromptedNASAtobuildouta

generalizedcapabilityofdecomposingtasksfromvariouspartsofspaceoperations

andtoconsiderusingexternalinnovationcommunitiesasaroutinepartofits

researchanddevelopmentefforts.Inthiscase,contrarytoAppleandLEGO,NASA

didnotbuildoutitsowncommunityofexternalsolvers.InsteadNASAchoseto

leveragetheinvestmentofexistingcommercialplatformsthathaveamassedviathe

Internethundredsofthousandsofindividualswhohaveaninterestinsolving

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scientificandtechnicalproblems(SeeFigure5).HoweversimilartoAppleand

LEGO,NASA’sshifttomoredynamicinnovationboundarieswasinitiatedunder

performancepressuresandwasaccompaniedbychangesinNASA’sculture,

capabilities,structure,andidentityasitattemptedtomanageinternaland

communityinnovationmodessimultaneously.

OpenInnovationandComplexOrganizationalBoundaries

Insettingswhereaproduct’scoretaskscanbemodularizedandwherethecostsof

communicationarelow,traditionalmodesoforganizingforinnovationarenot

comparativelyeffective.Undertheseubiquitousconditions,openinnovation,as

exemplifiedbyopencommunitiesandopencontests,transformstheeconomicsand

socialorganizationofinnovationactivities(BaldwinandVonHippel,2011;Benkler,

2006;MurrayandO’Mahony,2007).Traditionalorganizingmodelsbasedoncost

minimization,power,controlofcontingencies,andextrinsicmotivation,andwhere

thelocusofinnovationiseitherwithinthefirmorwiththefirmandtrusted

partnersmustbesupplementedwithorganizingmodelsrootedinlogicsof

openness,sharing,intrinsicmotivation,andcommunities.

Totheextentthattheseinnovationmodesarecomplementary,thesecontradictory

innovationlogicsmustbereflectedintheincumbentfirm’sorganizationaldesign.

Suchcontrastinginnovationmodesrequiremorecomplexorganizationaldesigns,

morecomplexboundaries,morecomplexorganizationalidentitiesandassociated

managerialrequirements.Further,asthesemoreopeninnovationrequirements

takeplaceinthecontextofafirm’sclosedinnovationhistory,theintrusionofopen

innovationlogicisassociatedwithpunctuatedorganizationalchanges,usually

initiatedundercrisisconditions(egTushmanandRomanelli,1985).

Whatarethecontingentvariablesthatpushinnovationfrommoretraditional

closedandhierarchicaltomoreopenanddistributedmodes?Wesuggestthatthe

fundamentalcontingentvariablesinselectinginnovationmodesandassociated

boundariesaretheextenttowhichtheproductisintegratedinnatureandthe

32

extenttowhichproblemsolvingknowledgeisdistributed(seeFigure6).Whencore

tasksareintegratedinnature(egApple’sconsumerexperience,NASA’sadvanced

exploration,orLego’splasticbricktoys)andproblem‐solvingknowledgeis

concentrated,thenmoretraditionalintra‐firminnovationlogicapplies(seealso

NickersonandZenger,2004).Undertheseconditions,firmsinternalizeR&Dand

buildaninnovativeculture,capabilities,absorptivecapacities,andprocessesthat

locatesolutionsearchandevaluationknowledgewithinthefirmand/orwith

trustedpartners(seeApple’sintegrationofmobilehardware).Theseintra‐firm

boundariesvaryfromsimplefunctionalboundaries,tomorecomplexambidextrous

designs,torelationswithexternalpartners(egLEGO’sCEDunit).

Insharpcontrast,whentheproductcanbedecomposed(ormodularized)andwhen

problem‐solvingknowledgeisbroadlydispersed,thelocusofinnovationshiftsto

communitiesormarketsoutsidethefirm.Suchashiftininnovationlocusrequires

incumbentfirmstoengagewithexternalcommunitiesinopen,democratic,

collaborativerelations.(forexample,NASA’srelationswithexternalproblem

solvers,LEGO’srelationswithitsinvolvedusers,andApple’srelationswith

applicationssuppliersandanonymousoperatingsystemcollaborators).Whencosts

ofcollaborationarelow,thegreaterthetask’smodularity,andthegreaterthe

knowledgedispersion,themoreopeninnovationanditsassociatedcomplex

organizationalboundariesdisplaceintra‐firminnovation.

Theseshiftsfromclosedtoopen,peer,communityinnovationareassociatedwith

organizationaltransformationsastheyinvolveintegratedchangesinthefirm’s

structure,boundaries,competencies,culture,andidentity.AsseenatNASA,Apple,

andLEGO,thesepunctuatedchangesoccurundercrisisconditionsandaretypically

initiatedbynewtopteams.Further,theseboundariesshiftovertimeastasks

becomemoreorlessstrategic.AtApple,forexample,itsshiftinmobileprocessors

fromopentoclosedinnovationreflectedApple’sjudgmentaboutthestrategicvalue

ofintegratedmobilechips.Finally,firmsaremadeupofportfoliosofinnovation

types.Forexample,LEGOmakestraditionalplasticblocksevenasitmakesit

33

Mindstormrobots,NASAinnovatesinternallyonadvancedexplorationprojects

evenasitemploysopeninnovationonarangeofmodulartasks,andApple

innovatesinternallyoncustomerexperienceevenasitinnovateswithcommunities

inapplicationsanditsoperatingsystem.Themorecomplexthefirm’sinnovation

streams,themorecomplexitssetofinnovationlogics,themorecomplicatedand

internallyinconsistentitsorganizationalarchitectureandassociatedsetof

boundaries.

Theorganizationdesignissuesassociatedwiththecombinationofopenandclosed

innovationmodesaresubstantialbecausetheseinnovationmodesarethemselves

rootedinfundamentallyinconsistentorganizinglogicsandbecausetheygoagainst

theinertiaoftheincumbent’shistory.AsseenatLEGO,NASA,andApple,such

complexinnovationstreamsinvolvecomplexandheterogeneousidentities,complex

boundariesandboundaryspanningcapabilities,andcomplexgovernancemodes

(e.g.seealsoFlemingandWaguespack,2007;O’MahonyandBechky,2008).Firms

mustbuildinthecapacitytoattendtoparadoxandcontradictionasopenandclosed

innovationlogicsarebasedoncontrastingsetoforganizationalassumptions.The

morecomplexthesetofboundariesspanned,thegreatertheimportanceofafirm’s

absorptivecapacity(CohenandLevinthal,1990).Butwhereabsorptivecapacity

hasbeentraditionallyrelatedtoR&Dspendinganditsassociatedenhanced

combinativecapabilities(egKogutandZander,1992;RothaermelandAlexandre,

2009),inanopeninnovationcontext,absorptivecapacityincludesbothcombinative

aswellascollaborativecapabilities(egRosenkopfetal,2001).

Finally,ifopenandclosedinnovationmodesarecomplementaryyetinternally

inconsistent,thefirm’sseniorteammustattendtoanddealwithbothinnovation

logics.Agencyassociatedwithinnovationstreamsandtheassociatedcomplex

organizationalboundariesisrootedinstrategicchoicesoftaskintegrationor

decompositionaswellastheleaders’diagnosisofknowledgedistribution

(NickersonandZenger,2004;JeppesenandLakhani,2010;KingandLakhani,2011).

ThusourAppleexampleillustratedstrategicchoiceinbothtaskdecompositionin

34

operatingsystemsaswellastaskintegrationformobilehardwareanduser

interface.Oncecomplexinnovationmodesarechosen,theassociatedcomplex

organizationalarchitecturesandboundariesareexecutedinsettingsthatcan

handletheidentityandinnovationlogicconflicts,andpunctuatedchanges

associatedwithoperatinginopenandclosedinnovationmodessimultaneously(eg

Gioiaetal,2000;SmithandTushman,2005;KaplanandTripsas,2008).

Whileopenandclosedinnovationmodesmaybecomplementary,whenmightthey

besubstitutes?Asproductsandservicesbecomemoremodularizedandas

communicationcostsdropsuchthatdispersedknowledgeiswidelyavailable,open

innovationcommunitiesemergethatincreasinglydisplaceclosedinnovation

(Benkler,2006;O’MahonyandLakhani,2011).Undertheseincreasinglycommon

conditions,opencommunityinnovationdoesnotcomplementfirm‐based

innovation,butrathersubstitutesforit(egEMI’sinabilitytodealwithnewformsof

musicgeneration,funding,production,anddistribution).Ifso,incumbentsmaybe

pushedoutofgeneratinganythingbutincrementaland/orprocessinnovation(von

Hippel,2005).Itmaybethatnewentrantsdominateincumbentsinnewproduct

creationbyrelyingoncommunityinnovationforallsubstantiveinnovationexcept

forinnovationincustomerexperienceand/orproductintegration.Forexample,

newentrantsLuLuLemonandThreadlessinnovateinwomen’syogaappareland

fashionT‐shirts,respectively,byrelyingoncommunityinnovationinproduct

generationandselection.Ifcommunityinnovationdoessubstituteforfirm

innovation,theincumbentmayswitchitsinnovationstrategytofocuson

incrementalinnovationandscaleandpartnerwith(oracquire)openorientednew

entrantsfornewproducts.

ImplicationsandConclusions

Openinnovation,enabledbylowcostcommunicationandthedecreasedcostsof

memoryandcomputation,hastransformedmarketsandsocialrelations(Benkler,

2006).Incontrasttofirmcenteredinnovation,openinnovationisradically

decentralized,peerbased,andincludesintrinsicandpro‐socialmotives(Benkler,

35

2006;vonHipple,2005).Whilethecommunitynatureofpeerinnovationis

developingitsownliterature,andweunderstandthenatureandsocialstructureof

thesecommunities(egO’MahonyandLakhani,2011;O’MahonyandFerraro,2007;

Rosenkopfetal,2001),theimpactofthisinnovationmodeonthefirmisnotwell

understood.Wedonotyethaveatheoryofthefirm,eitherforincumbentsornew

entrants,whichtakesintoaccountcommunityinnovation.Theimpactofopen

innovationontheorganizational,strategy,andinnovationliteraturesisminimal(eg

seeArgote,2011).

Theliteratureinorganizationaltheoryandinnovationisfirmlyrootedinthefocal

firmmanagingitstransactioncosts,minimizingitsdependenceonitscontext,and

buildingabsorptivecapacitybasedonR&Dandcombinativerelationswithselected

partners.Open,peerinnovation,withitsfundamentallydifferentorganizing

assumptions,isatleastacomplement,ifnotasubstitute,forfirm‐basedinnovation.

Ifso,ourtheoryofinnovation,organizationaldesignandleadershipforinnovation

mustbeinformedbythesecontrastinginnovationmodes.Theliteratureonthe

managementofinnovationhasbeenbuiltonabaseofindustrialproduct‐oriented

researchinaworldwherecommunicationcostsacrossboundariesweresubstantial.

Explorationnowincreasinglyresidesoutsidetheboundariesofthetraditionalfirm.

Itisinconceivablethattoday’smodelsoforganizationsandinnovationreflectthe

realityofinnovationinaworldthatisevermoreopenandmodularized.Our

organizational,innovation,andleadershipliteraturesneedtoreflectandreconcile

theimplicationsofopeninnovationmodels.

Asopenandfirm‐basedinnovationarebasedoncontrastingassumptionsofagency,

control,motivation,andlocusofinnovation,ouremergingtheoryoforganizingfor

innovationmustreflecttheseparadoxicalandinternallyinconsistentinnovation

modes.Ourinnovationresearchmustmovetotheinstitutionallevelasweexplore

howcommunitiesinformandshapethefirm,andhowthefirmshapesandleverages

itscommunitiesinserviceofitsinnovationstreams(egJacobidesandWinter,in

press;Rosenkopfetal,2001;O’MahonyandLakhani,2011).Similarly,ifopenand

36

marketbasedinnovationarecomplementsandthefirm’sboundariesarecontingent

ontheproduct’sdegreeofmodularityandknowledgedistribution,multipletypesof

boundarieswillbeemployedtomanageinnovation.Theseboundarieswillrange

fromtraditionalintrafirmboundariestocomplexintrafirmboundaries(eg

ambidextrousdesigns),towebsofinterdependencewithpartners,to

interdependencewithpotentiallyanonymouscommunities.Justhowarethe

mechanismsassociatedwithleadingcomplexintrafirmboundaries(egO’Reillyand

Tushman,2008)andrelationswithpartners(egRothaermelandAlexandre,2009)

differentfromshapingrelationsinopencommunities(egO’MahonyandFerraro,

2007)?

Thetheoryofinnovationandcomplexorganizationalboundariescanbuildon

extantliteratureonparadox(eg.AndriopoulosandLewis,2009)andextendthis

worktocontradictoryinnovationmodes.Theseparadoxicalinnovationmodes

requiretheoryandresearchongovernance,incentives,intellectualproperty,

professionalandorganizationalidentity,andorganizationalculturestoattendto

theseheterogeneousinnovationrequirements(egGioia,etal,2000;Baldwinand

vonHippel,2011;MurrayandO’Mahony,2007).Assomuchofthisworkon

dynamicboundariesinvolvesseniorleadersmakingchoicesinvolvingcontrasting

innovationmodesinthecontextofthefirm’shistory,itisalsoimportantto

understandhowmanagersthinkaboutinnovationandorganizationdesignsina

waythatadmitsthesecontradictions(egSmithandTushman,2005;Kaplanand

Tripsas,2008;SmithandLewis,2011).

Finally,wehavefocusedhereonthechallengesfacedbyincumbentfirmshavingto

respondtoincreasinglyopeninnovationrequirements.Muchworkneedstobedone

onthecharacteristicsofnewentrantsthatareborninacontextalreadyrootedin

openinnovation.Itmaybethatthefoundingoffirmsanchoredinopeninnovationis

fundamentallydifferentthanthatoftraditionalentrepreneurialstart‐ups.Itmay

alsobethatfirmslikeLuLuLemonorThreadlessbuildtheirinitialbusinessmodels

37

basedonopeninnovationlogicandonlydealwithmoretraditionalinnovationand

organizationaldynamicswhentheygotoscale(Lakhani,2009).

Whilethetheoreticalandresearchimplicationsofcontrastinginnovationmodes

andassociatedcomplexboundariesaresubstantial,sotooaretheimplicationsfor

managerialchoiceandagency.Ifopenandfirm‐basedinnovationarecomplements,

thereisimportantchoiceastowhichtaskswillbeexecutedineachinnovation

mode.Wesuggestthatthesechoicesarecontingentontheextenttowhichcritical

taskscanbedecomposedandtheextenttowhichthetasks’knowledge

requirementsareconcentrated.Thesestrategicchoicesneedthentobeexecuted

withthesystems,structures,incentives,cultures,andboundariestailoredtoopen

andfirmbasedinnovationmodes.Further,ifthefirmisevermoredependenton

opencommunities,howdoleadersacttoinfluencetheseexternalcommunities?

Finally,seniorteamsmustbuildtheirownpersonalcapabilitiestodealwith

contradictionsaswellastheirfirm’sabilitytodealwithcontradictions(Smithand

Lewis,2011).Whilebuildinginternallycontradictoryorganizationalarchitecturesis

difficult(seeO’ReillyandTushman,2011;O’Reilly,Harreld,andTushman,2009),

buildingthesearchitecturestoattendtocontrastinginnovationmodeswillbemore

challenging.

Insum,incontextsofincreasingmodularityanddecreasedcommunicationcosts,

openinnovationwillatleastcomplement,ifnotincreasinglysubstitute,formore

traditionalinnovationmodes.Wehavesuggestedasetofcontingentvariables

associatedwithbuildingorganizationalboundariesthatattendtotaskand

associatedknowledgerequirements.Asthesetaskrequirementsarenotstable,

theseorganizationalboundariesareinherentlycomplexanddynamic.Furtheropen

innovationisrootedintheabilityofmanyexternalactorstodirectlyinfluencethe

rateanddirectionofinnovationactivity,andisassociatedwithafundamentally

differentsetorganizingassumptionsthantraditionalfirm‐basedinnovation.This

setofcontrastinginnovationmodes,wheretraditionalfirmbasedinnovationlogicis

38

evermorereplacedbyopeninnovationanditsassociatedboundarycomplexities

andorganizationaltensions,representanimportantopportunityforscholarsof

strategy,innovation,andorganizations.Thesechallengesalsorepresentagreat

opportunitytothoseleadersandseniorteamsthatcantakeadvantageofthese

contrastinginnovationmodes,paradoxicalorganizationalrequirements,and

associateddynamicboundaries.

39

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FIGURES

48

49

50

Narrow

Figure 3 Generation and Selection Knowledge and Locus of Innovation

Selection Knowledge

Solution Generation Knowledge BroadNarrow

Broad

Market: Voting and Approval Contests

Market: Tournaments and Prizes

Community

Intra‐Firm 

51

52

53

Figure 6. Task Decomposition, Problem Solving Knowledge Distribution, and Locus of Innovation

Apple: PC & Mobile Standards 

Low (Integrated)

Problem Solving Knowledge Distribution 

Task Decomposition

BroadNarrow

High (Modular)

Partner

Consortia

Community

Market

NASA: Open Innovation Contests

Apple: Open Source Community OSLEGO: AFOL & NXT Hackers, LEGO MUPS & Ambassadors

Apple: PC Hardware 

NASA: Vehicle Design & Manufacturing

Apple: OS, UI, Mobile Hardware

LEGO: Brick Design, Themes & Scenes, NXT S/W

NASA: Life Sciences, Space Operations, Advanced Exploration

Ambidextrousdesign

Intra‐Firm