Open Source Strategy Research Blog

Updating business strategy for a world embracing open source

Tuesday, April 2, 2013

Why Do Firms Use Open Source Strategies? – An Uncertainty Reduction Theory

I just received the good news that my paper has been accepted to the Business Policy and Strategy Division of the Academy of Management for presentation at the annual conference in Florida in August, 2013.  The abstract for the current version of the paper is below, along with a link to the draft.

Abstract:

Recent academic inquiry has questioned the traditional assumptions that successful market competition among profit-driven firms must be done in a closed manner to avoid competitors benefiting from knowledge spillovers by demonstrating that an open source strategy can be successful as well. Yet, it is still not well understood why firms choose an open source strategy when they have an array of more traditional strategies at their disposal.  I argue that firms select an open source strategy to reduce the impact of different types of uncertainty that impede the clarity of their strategic options.  An open source strategy allows firms to accept, disarm, share, compartmentalize, survive, and select uncertainty, reducing the negative impact of discontinuous change, transaction costs, loss of control, resource allocation problems, environmental selection, and poor fit.  This choice means that firms are not stuck with strategies requiring high-stakes bets, hedging practices, or luck in order to reduce uncertainty.  Instead, they can select an open source strategy that best reduces the types of uncertainty that they are facing.

Check out the full version of the current draft: Why Do Firms Use Open Source Strategies – An Uncertainty Reduction Theory

posted by Mekki at 1:07 pm  

Wednesday, March 6, 2013

Pitch to Mozilla for Role of Director, Webmaking Science Lab

Today I made a pitch to my friends at Mozilla for the role of Director of the Webmaking Science Lab.  Details of the position are posted here: http://careers.mozilla.org/en-US/position/oQuSWfwS

Here’s the pitch I made.  Feedback is welcome.  I hope they find it as interesting as I think it is! :)

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To My Friends at Mozilla:

I am very excited to apply for the position of Director, Webmaking Science Lab.  I have always had my foot half in academia and half in the world of the open web and related technologies, and to date I have struggled to find a position that was a good match for my unique mix of skills and experience.  This position appears to fit the bill perfectly!  I believe I am well suited for the position for 3 reasons: 1) I have close connections to academia; 2) I have both technical and communication skills; and, 3) I’m passionate about the potential of the Web.  I’ll elaborate briefly on each.  I’ll then wrap up with a pitch that I hope you will find interesting and well-suited to the broader mandate of the position.

I have taken a somewhat unique path in academia, which makes me a surprisingly good fit for this role.  I have undergraduate degrees in computer systems engineering (and I’m a professional engineer) and psychology.  My Master’s degree is in technology and innovation management.  I’m currently completing my PhD in strategic management, focusing specifically on open source strategy (more on that in the pitch).  The benefit of this winding path is that I am familiar with the different ways research is done in different academic fields.  In engineering, research is often applied, focusing on modeling and experimentation.  Precision is everything and replicability for auditing and review is essential.  The tools used for research in engineering are often so sophisticated that they are custom-made by software companies that specialize in those niche areas.  Yet, I was always surprised when one of my advisors wasn’t familiar with basic things like versioning systems or databases or regexes.  They were often very impressed by my basic hacks in PERL (at the time!) that probably looked like something from the obfuscated PERL contest to their eyes.  So I recognize the gap in awareness of the tools out there even in the field of computer engineering.  In psychology research, the focus is very different.  Much research is done with human subjects and the tools needed are mostly for tracking and analyzing data.  Here matrix programming (with R, for example) becomes crucial.  I’ve been (peripherally) involved with some development of R modules for teaching and research.  Most psychology (and related field) researchers have a limited technical background and are often intimidated by complex tools. Here, the key is finding a teaching approach that promotes understanding and simplicity, focusing on particular tasks, rather than first principles and details (which the engineers love!).  Finally, my Master’s and PhD research has been on the business side.  Business schools house a unique brand of social science researcher that is focused on corporate phenomena, big data, surveys, and case studies.  There is as broad a difference in the research methods and associated tools used by sub-disciplines in business such as marketing, strategy, accounting, finance, and organizational behaviour, as there is between engineering and business.  I have conducted both qualitative and quantitative research in these areas and understand the restrictions and barriers to entry that these researchers face.  In summary, not only do I have tight-connections to academia, but I also have a broad cross-section of familiarity with different academic fields and the specific needs, constraints, and challenges of each one.

With regards to my skills, on the technical side, I have extensive industry experience, working for startups, large enterprise, government, and even founding my own companies.  I have done professional software development, systems administration, project management, web development and admin, and much more in Unix (HP-UX), Linux (many flavours), and Windows (many flavours) environments.  For my undergraduate project, I developed a real-time desktop versioning system using the rsync algorithm (looked a lot like what Dropbox is today, though this was nearly 10 years ago. :).  More details of my technical skills are in my resume.  But, all the technical skills in the world are of no use if one cannot communicate and teach.  I have focused much of my personal development effort over the past decade into communication and teaching skills.  I learned to teach at a young age teaching Taekwondo to students from the age of 5 to 75.  The principles of teaching kicks and punches in Korean to both children and adults alike, and having them understand the lessons, are not so different from teaching technical skills to those who are unfamiliar with, and sometimes intimidated by, technology.  This past year I also taught a class of undergraduates at the Schulich School of Business.  I received very positive reviews (available on request) from my students about the quality of my teaching.  They particularly liked my style of engaging and soliciting participation, rather than lecturing.  In summary, leadership requires more than technical chops.  It also requires communication skills.  I have a balance of both that fits really well with this role.  If you’d like to see a sample of my teaching style, I gave a presentation this past October at the 2012 Free Software and Open Source Symposium at Seneca College in Toronto on Open Entrepreneurship that was well received by the audience and colleagues ( https://senema.senecac.on.ca/videos/1956/fsoss-2012-open-entrepreneurship ).

I have been passionate about the Web and its potential since it first caught my eye in 1995. I was connecting to BBSs on a 2400 baud dial-up modem and finding an open telnet relay that allowed you to use a Lynx text-based browser to view pages, well, that was unbelievable!  I followed closely as the web and web browsers developed in parallel.  The initial release of Netscape’s source code to form the Mozilla project was a very important moment.  I was working at Nortel Networks at the time, doing Apache web server administration, and I saw this move as an explosion of potential for the Web.  Not too long later, I attended the Mozilla 1.0 (not Firefox 1.0 :) release party in Ottawa and began meeting some of the talented minds behind the project.  Today, I’m fortunate to be friends with some of the brilliant people who continue to explore the potential of the open web, including employees of Mozilla, employees of other major projects like Ushahidi, Eclipse, and OpenOffice.org, and many entrepreneurs, programmers, and users in diverse open communities who continue to push the Web platform forward.  I have been involved in advocacy for copyright, privacy, and technology reform (spam, DRM, rootkits, telecom, wireless spectrum, etc.) with the Canadian government (I have great stories! :) and have positioned my own research to help bridge the business and technical worlds so that businesses can better understand why the open web and open collaboration are not only the “right” thing to do, but are also good for business.  It would be a privilege and an honour to be able to work with the Mozilla Foundation (and Sloan Foundation) to help promote these goals by connecting to academic communities around the world and showing them how to unlock this potential.

We come now to the pitch.  Here’s what I propose:  I am currently planning out my dissertation work for my PhD.  My current research focus has been on Mozilla itself.  I have been interviewing employees of Mozilla and other participants in the open web ecosystem to learn more about what they do and how they do it.  I have also requested and received a dump of the entire Bugzilla database and am planning on analyzing it in order to better understand the nature of corporate contributions to Mozilla projects and how knowledge flows between companies.  You can read a bit about that project in the Bugzilla post (https://bugzilla.mozilla.org/show_bug.cgi?id=795453).  A broader outline of that research plan can be found on my research blog (http://blog.osstrategy.org/?p=109).  So where am I going with this?  I propose to do my dissertation research in-vivo at Mozilla.  What better way to understand a company than by following ethnographic principles and learning from the inside?  As part of the Webmaking Science role, one of my major activities would be to carefully document exactly how I went about my research, what tools I used, what analysis techniques I selected and why, such that my experiences can be documented and leveraged by other researchers.  This idea occurred to me when I was chatting with friend at Mozilla about my Bugzilla database analysis and they were very curious about how I would go about analyzing the huge 8GB SQL file that I have.  It’s challenging to work these things out, for academics and practitioners alike.  I could provide a live, real-time model of all of the lessons that the Webmaking Science Center is trying to teach while conducting research on Mozilla itself from within.  I would be a living example in the organization of how to conduct academic research using all of the tools and skills that the Center is promoting to other researchers!  Mozilla has always been about walking the talk.  It selects employees who are living examples of the principles that it promotes.  I would fit that bill by being a representation of how academic research can be conducted using all of the Software Carpentry resources (and adding new ones along the way!).  Further, the outcomes of my research would be of even greater benefit to Mozilla and our open web goals as I am bound to uncover even more insights while collaborating with people as a member of the organization.  It is my hope that the outcomes of my research will eventually attract further grants to promote the activities of the Mozilla Foundation by tying them more closely with both academic research and business practice.  By working within Mozilla, I could steer my research as it evolves to remain continuously relevant to the organization while helping the Foundation select from the many paths it could follow as its mandate evolves.  My expertise in strategy and technology management combined with my research into the many layers of the organization and the ecosystem in which it is embedded are the right combination needed to drive the Mozilla Foundation’s mandate forward.  I hope you share my excitement and enthusiasm about the potential here!

To wrap up: I have a unique profile that balances a cross-section of academic background (engineering, psychology, technology, business, etc.), with technical skills from work experience (enterprise, government, entrepreneurship, etc.), and communication skills (from writing, teaching, conference presentations, etc.).  I have extensive experience liaising with academics and understand the motivations and constraints of several fields.  I have project management experience and know how to lead initiatives and build their success.  I am fluent in academic, technical, and business languages, and, perhaps most importantly, know how to translate between them!  My PhD research pitch provides a unique opportunity to have an in-vivo example of the Webmaking Science Lab activities, documented and developed over time to better understand Mozilla as an organization and shape and evolve its mandate, potentially attracting more funds and corporate interest in the future.  I have several friends in the Mozilla community and in other FLOSS communities in Toronto, Ottawa, and internationally, and would fit in well in the Mozilla Toronto office (I regularly hang out in the community space there anyways! :).

I hope you find me a curious and interesting candidate for the position!  I would be delighted to discuss these and many other ideas that I have for the program with you in more detail in person, on the phone, or over the web (I can be found in 8 different Mozilla IRC channels (#toronto primarily), on Twitter (@mekki), LinkedIn, Skype (mekkim), Facebook, and a dozen other web presences).  I can also provide you with references that can attest to my passion and suitability.

Thanks! ^_^

Mekki

 

posted by Mekki at 4:17 pm  

Wednesday, March 6, 2013

Investigating Knowledge Flows in Meta-Organizations

Here’s the shape of my current dissertation plans.  Feedback welcome!

Is it good or bad for firms to participating in meta-organizations?  The literature has not yet resolved this issue and the objective of my research is to fill this gap by investigating how a firm’s participation in meta-organizations affects its ability to capture value from its knowledge resources. Meta-organizations, which “comprise networks of firms or individuals not bound by authority based on employment relationships” (Gulati, et al., 2012: 573) have received increased attention in the literature recently as they appear to be governed neither by market, nor hierarchy, nor network forces (Demil & Lecocq, 2006). This focus has brought old strategy debates on the boundaries of the firm (Coase, 1937; Williamson, 1975) back into the spotlight because the strategic interactions (Kuk, 2006) that take place between firms during participation inescapably lead to knowledge flowing both into and out of the participating firms. According to the knowledge-based view of the firm, which suggests that firms exist because they are better than other organizational forms at exploiting knowledge to produce useful outcomes (Grant, 1996), there are both incentives and disincentives to extending the knowledge boundaries of the firm by participating in meta-organizations.

On the one hand, extending firm knowledge boundaries can lead to knowledge spillovers to competitors (Dyer & Nobeoka, 2000), which undermine one of the cornerstones of competitive advantage by allowing imitation of the valuable knowledge resource (Barney, 1991; Peteraf, 1993). It may also be pointless to participate in meta-organizations if a firm cannot exploit the knowledge that it learns due to limited absorptive capacity (Szulanski, 1996), rigidities and values within the firm (Leonard-Barton, 1992), or the tacitness of the knowledge (Nonaka, 1994). On the other hand, extending firm knowledge boundaries can improve product development quality (Matusik, 2002) and improve a firm’s ability to internally transmit knowledge (Kogut & Zander, 1992). It may also give a firm access to knowledge that it might not have been able to create on its own (Goldman & Gabriel, 2005). Further, the value lost to competitors in knowledge spillovers might be smaller than the value that firms capture from participation, leading to a net value increase (Casadesus-Masanell & Llanes, 2011). In addition, the net value of participation may be determined by the complementariness of a firm’s resources and capabilities rather than the location of the knowledge boundaries of the firm (Dyer & Singh, 1998).

My research addresses this conflict in the literature by investigating three specific research questions: 1) Which characteristics of meta-organizations are optimal for the development and sustaining of knowledge-based competitive advantage by participating firms? 2) What governance forms and norms of interaction in meta-organizations promote optimal levels of knowledge-exchange between participants?  3) How long and in what ways must a firm participate in a meta-organization in order to generate valuable, exploitable knowledge resources?

The management literature has been unable to address these specific questions despite the availability of large databases that track open collaborations, which are a type of meta-organization comprising “any system of … production that relies on goal-oriented yet loosely coordinated participants who interact to create [something] of economic value, which is made available to contributors and non-contributors alike” (Levine & Prietula, 2012: 4). These databases are the ideal data source for exploring these research questions as the knowledge-sharing routines (Dyer & Singh, 1998) in open collaborations are different from those in traditional alliances and networks (Gulati, 1998) and direct inspection of all of the knowledge flows that take place during the collaborations is possible. Industry-standard databases such as COMPUSTAT only track financial performance and related data. There are no data about the specific knowledge-sharing activities of companies in particular collaborations. By contrast, the open collaboration databases that I have access to from the Mozilla Foundation (known for the Firefox web browser), the Eclipse Foundation (known for their suite of programming tools), and the Linux kernel (the core of the operating system run by over 90% of enterprises) collectively contain over 30 years’ worth of detailed interactions between some of the largest Fortune 500 companies (O’Mahony & Ferraro, 2007). There are more than 20 million unique data points that exhaustively codify all of the knowledge flows between both firm- and individual-level participants throughout the entirety of the collaborations and that have not previously been analyzed in management research. One possible reason that these databases have been overlooked is that they are technically complex and require expertise to access and interpret, resulting in previous research remaining mostly limited to the field of computer science. My unique combination of computer engineering, management and statistical analysis training enables me to access and analyze these extensive longitudinal panel data sources for management research.

This research will enable three important theoretical advancements. First, it will improve the accuracy of theoretical models of the relationship between knowledge creation and social forces, answering the call for such research by Nonaka and von Krogh (2009). Second, it will provide the first empirical investigation of lower-level knowledge sharing constructs in the context of governance mechanisms in meta-organizations, answering the call by Foss, et al., (2010). Third, it will improve the current limited understanding of the competitive implications of extending the knowledge-based boundaries of the firm (Lichtenthaler, 2011), answering the call by Bogers, et al., (2010).

This research will advance the practice of strategic management in three ways. First, it will enable managers to more accurately predict the outcomes of their firm’s participation in meta-organizations. Second, it will offer managers guidance on coordinating knowledge-sharing relationships with stakeholders outside traditional firm boundaries, in particular lead users (Dahlander & Frederiksen, 2012) and competitors (von Hippel & von Krogh, 2003). Third, it will improve the innovative potential of firms (Jacobides & Billinger, 2006) by demystifying an option for external collaboration that was impossible before the recent surge of novel meta-organizational forms (Benkler, 2002).

posted by Mekki at 3:12 pm  

Monday, February 11, 2013

What’s different about entrepreneurship with born-open businesses anyways?

I explore the question of what’s different about entrepreneurship with born-open businesses in this video of my Free Software and Open Source Symposium 2013 talk at Seneca College: Open entrepreneurship and born-open businesses

The slides from the talk appear in a previous post.

posted by Mekki at 1:36 pm  

Saturday, December 1, 2012

OSStrategy.org Supports Random Hacks of Kindness!

OSStrategy.org is providing server space on its virtual servers to support Random Hacks of Kindness Toronto (www.rhokto.ca / www.rhok.org) for its 2012 hack-a-thon to support humanitarian aid projects!

OSStrategy.org is a Toronto-based consultantcy that specializes in open source strategy.  How can your organization benefit from open source tools and methods to reduce costs, increase competitive advantage and build and grow a sustainable innovation community?  OSStrategy.org specializes in medium and long term strategy for organizations that are wondering “How can we succeed if we give away our hard work?!?”. Often, the more important question is “Can you succeed if you don’t adopt open methods in rapidly changing world?”  We can help sort through all the grey areas in between to ensure that you are maximizing your value generation and capture.

If we can help you shape the open source strategy of your organization, please contact mekki@osstrategy.org for more details.

 

posted by Mekki at 10:38 am  

Friday, October 26, 2012

FSOSS 2012 Presentation

Here’s my presentation from FSOSS 2012 on born-open businesses.  Feedback and discussion is welcome!

fsoss2012 ODP

fsoss2012 PDF

fsoss2012 PPT

posted by Mekki at 12:26 pm  

Monday, October 15, 2012

Peer production and uncertainty

I argue that peer production is an emerging strategy that firms leverage to reduce different types of uncertainty that impede their strategic decision making.  It is distinct from traditional strategies for uncertainty reduction in that it combines several different strategies, leveraging their strengths and minimizing their weaknesses, while addressing the same underlying uncertainty issues that firms face in turbulent and high-velocity markets.  The implications for this conceptualization of strategy is that firms do not have to engage in high-stakes bets or hedging practices in order to reduce uncertainty, nor do they have to rely on aggregation of tactics or luck for success.  Instead, they can select peer production projects that best address the types of uncertainty that they are facing, effectively extending the firm’s boundaries without the costs associated with traditional boundary expansion.

You can download the full draft paper here if interested: Peer production and uncertainty

posted by Mekki at 9:35 pm  

Monday, October 15, 2012

Profit seeking identity and productivity in open source communities

The issue of profit seeking—an identification as someone who seeks financial compensation directly or indirectly for work efforts—has been a longstanding point of contention in open source communities.  Profit seeking has taken on prototypical form such that it has become a distinct group that individual participants in open source communities use for identity self-categorization.  Open source communities differentiate themselves in part by their profit seeking identity, represented by the perceptions of organization members of the degree to which the community allows, encourages, and supports individual profit seekers.  The present research investigates the impact of both individual- and organizational-level profit seeking identity on the productivity of open source communities.  Hypotheses are formulated that suggest that profit seeking identities at both the individual and organizational level are positively correlated with individual and organizational productivity respectively.  Further, it is hypothesized that organizational profit seeking identity has a cross-level positive effect on individual productivity, controlling for the individual profit seeking identity.  Finally, it is hypothesized that organizational profit seeking identity moderates the effect of individual profit seeking identity on individual productivity and that this moderation is moderated by the level of agreement about an organization’s profit seeking identity.  A research design is proposed to test these hypotheses using survey and archival data to be collected from active open source communities.  The potential implications for research and practice are discussed.

You can download the full research proposal here if interested: Profit seeking identity and productivity in open source communities

posted by Mekki at 9:29 pm  

Monday, October 15, 2012

The institutionalized open source project: Decoupling institutional myths and practical concerns to advance the institution of open source

Abstract

The institution of open source has evolved out of an era where distinction from proprietary software development methods was akin to a social movement of objection to certain business practices and has moved into an era where open source development methods are widespread.  Membership in open source communities has continued to grow and the current participant base operates in a post-internet environment that is significantly different from the limited communication and collaboration environment that was present at the birth of the open source movement.  As a result, certain institutional myths that influenced open source community structure with the intent of helping the communities develop legitimacy and grow in the early days of the institution now hinder the practical activities that the communities depend on to survive and thrive.  This paper argues that open source communities need to find the balance of a loosely coupled state between their organization and the myths of the institution of open source, recognizing the institutional roots of the organization while adapting to modern practical concerns.   Open source communities that strike the right balance will improve their performance and maintain their legitimacy in the eyes of their stakeholders.  This balance will allow the institution of open source to continue to evolve, avoiding deinstitutionalization and remaining relevant in a changing environmental context.

You can download the full draft paper if you’re interested: The institutionalized open source project

posted by Mekki at 9:24 pm  

Wednesday, May 16, 2012

Looking for Dataset on Corporate Contributions to FLOS

Hello friends,

As many of you know, I’m currently working on my PhD in Strategy at the Schulich School of Business, York University. The focus of my research is Free/Libre/Open Source strategy (peer production strategy, if you’re familiar with Benkler’s work). I am now done my course work and am in the process of planning the specifics of my dissertation work that will be completed over the next year and a half.

I’m looking for a data set to analyze for my research. The specifics of what I am looking for are broadly defined because I will take whatever I can get or is available and find a way to make it useful. Broadly speaking, I’m looking for a data set containing one or more (or any combination of) the following things (need not be restricted to software):

- Year by year (or quarterly/monthly) financial contributions made by one or more companies to FLOS (broadly defined)
- Year by year (or quarterly/monthly) non-financial contributions (broadly defined, including things such as paid employee time to work on projects) by one or more companies to FLOS (broadly defined)
- Any other company-specific or FLOS project/community-specific (would also consider higher level of analysis) data measured over time on activities/contributions of companies or other definable groups (number of lines of code contributed, number of bug fixes, features added, other things, broadly defined)
- Any other data set that relates to FLOS in some way that you think I should consider analyzing (reasoning and suggestions would be most welcome)

The purpose I have in mind is to attempt to empirically address the question “what do companies get out of participating in FLOS” by pairing this data set with other data sets that I have access to and performing the appropriate statistical analysis. There are obviously huge limitations to this approach, but bear in mind that it is one of many different triangulation methods I am using to research the topic of FLOS strategy, including a suitable mix of both quantitative and qualitative methods at levels of analyses from the individual right up to institutional factors.

If anyone is familiar with sources for such data sets, your help would be greatly appreciated! Please feel free to forward my message to anyone who you think might be able to help (anyone have contacts inside companies? I could anonymize anything that were published to protect any required confidentiality…)

Feel free to contact me offline via one of my many different online presences (see below) if you would like to discuss. Your input to my research and suggestions are most welcome!

Thanks!

Mekki


Mekki MacAulay Abdelwahab
B.Eng., B.A., M.A.Sc., P.Eng.

Email: mekki@mekki.ca / mekki@yorku.ca / mekki@osstrategy.org
MSN: atriou@hotmail.com
Gtalk:mektek@gmail.com
Skype: mekkim
ICQ: 26465030
Facebook: https://www.facebook.com/mekki
Google+: https://plus.google.com/109175295655095213074
Web: http://mekki.ca / http://osstrategy.org
Cell/SMS: 647-771-1208

posted by Mekki at 9:17 pm  

Monday, March 21, 2011

With apologies to Joss Whedon

Open Source Song, sung to the tune of the Firefly theme song

Take my tech, take my trend
Take me where I cannot lend
I don’t care, I’m still free
You can’t take open source from me
Take me out to the hack
Tell them I ain’t comin’ back
Burn Linux and foil the fee
You can’t take open source from me
There’s no place I can be
Since I replaced Windows ME
But you can’t take open source from me…

posted by Mekki at 9:49 pm  

Tuesday, February 8, 2011

Make, Buy, or Open Source: Maximizing Appropriable Value by Reducing the Transaction Costs of Leveraging Knowledge Assets

This short paper begins by reviewing the papers on property rights and the phenomenon of open source from the economics and organization science perspectives. I then investigate the potential to extend the resource-based view and property rights economics perspective and the nature of make or buy decisions by highlighting the competitive advantage created by widely sharing property rights over knowledge-based resources in circumstances where both markets and hierarchies are suboptimal for the exploitation of these resources. I conclude with an example that suggests that the path to maximum value appropriation for a focal firm may sometimes be to allow as many outside actors as possible to exercise property rights over some of its resources.
Foss and Foss (2005) compare property rights economics to the resource-based view of the firm. They first extend the RBV definition of resource attributes to account for the property rights which may be held for each attribute of a resource at a firm’s disposal. They define these property rights as the “right to use, consume, obtain income from, and alienate” attributes of resources (Foss & Foss, 2005). Their major contribution to the strategy literature is the introduction of the notion that resource transactions involve the exchange of property rights over resources, not the exchange of resources per se, and that such transactions have transaction costs, the reducing of which can create capturable value for the firm that owns the property rights. The transaction costs that can be reduced are the costs of exchanging, defining and protecting the property rights. They further contribute by demonstrating how property rights can increase the demand curve for complementary goods that a firm offers, resulting in a net value capture that is independent of returns directly relating to the property rights (See figure 1, Foss & Foss, 2005). The scenario they present alludes to strategic implications surrounding circumstances where sharing property rights over resources without direct compensation for those rights might lead to increased value creation and capture by the firm. Foss & Foss (2005) conclude their paper with a call for future research examining exactly such a possibility.
Lerner and Tirole’s (2002) paper on the economics of open source examines the phenomenon in the software industry where skilled developers work to develop collective projects without obvious incentives or rewards. The major contribution of their paper is the examination of conditions where firms might wish to release their innovations as open source in order to increase their returns on the asset. They suggest that firms should open source resources when 1) the release of the property rights will lead to increased value acquisition in a complementary asset, and 2) this increase in value acquisition in complementary assets is larger than would have been possible directly through the selling of the property rights to the resource (Lerner & Tirole, 2002). They further argue that firms might benefit from a signalling advantage when they open source resources, similar to the advantage seen in joint ventures, because the adoption of an open source strategy is read by partners as a promise to not expropriate their complementary goods and services in the future (Lerner & Tirole, 2002). The net trust benefits increase cooperation in the ecosystem, and promote involvement between heterogeneous players, who support each other. Finally, they argue that the risk of imitation by competitors may be overstated due to the heterogeneity of firm capabilities (Lerner & Tirole, 2002). This assertion hints at situations where firms might be able to leverage the advantages of an open source strategy while minimizing the risks of loosening property rights restrictions.
In their paper, von Hippel and von Krogh (2003) contribute to the organization science and strategy literatures by suggesting that the open source phenomenon is an example of a novel “private-collective” innovation model. They propose that this mixed innovation model takes parts of both the traditional private and collective innovation models to maximize the advantages while minimizing the weaknesses inherent in the separate model. They make two major contributions. The first contribution is the description of the loss in value creation potential that arises when the “private-collective” innovation model is used by society to incentivize innovation. As they put it: “the monopoly control that society grants to innovators represents a loss to society relative to the free and unfettered use by all of the knowledge that the innovators have created”. In other words, the total value that the knowledge asset could have created is artificially constrained by the property rights protecting its use by others. The strategy implications of this circumstance is that the value that is lost may be of consequence to the firm that is protecting its rights by constraining use of their resources, as it could be value that the firm could have otherwise obtained itself. The second contribution is the challenging of the agency-theory-like assumptions that are implicit in the traditional innovation models, namely that innovators must be incentivized to innovate and that “free-riders” will extort benefits from collective innovations without contributing anything in return. Instead, von Hippel and von Krogh (2003) argue that by relaxing this assumption, the collective action innovation model “ceases to be a prisoner’s dilemma because members cease to regard participation as costly” (von Hippel & von Krogh, 2003). Participation becomes a benefit in itself, through learning effects, network effects, reputation effects, and positioning effects, leading to the formation and growth of an ecosystem centered on the shared resource. This change in paradigm suggests that there are certain benefits to reducing the constraint on the property rights to a resource that are only available to the focal form. These benefits act as a form of selective incentives that primarily increase the focal firm’s ability to appropriate the value created by the resource, even while that value is created by others.
All three of the papers previously discussed yield insights that have a strong commonality to each other: they all describe circumstances where conventional wisdom about property rights—i.e. that firms should hold tight to them, and that not protecting them leads to a loss of value through competitive imitation—may not hold true. Excluding non-owners from using and obtaining value from resources is costly, and provides no guarantees that the rights-owning firm can appropriate any of the value that the resources have the potential to create (Foss & Foss, 2005).
Barney (1991) argued regarding the strategic application of resources that sustainable competitive advantage is the result of “a value creating strategy not simultaneously being implemented by any current or potential competitors, [where] these other firms are unable to duplicate the benefits of this strategy”. Barney surely intended that the reason other firms were “unable to duplicate the benefits of this strategy” was due to their inability to access the benefits of the VRIN resources controlled by the firm; yet, the definition doesn’t preclude other explanations for why competitors can’t duplicate a strategy. It is entirely consistent with the resource-based view that competing firms might have access to resources but be unable to leverage them to obtain a competitive advantage. For example, a focal firm that has property rights to a resource may also have knowledge about how to best apply the resource to create value for a target customer base. Independent of that knowledge, the resource itself is less valuable. It is the knowledge that multiplies the value-creating properties of the resource. Said another way, resources have inherently different values to different firms due to heterogeneous firm capabilities. As such, freely granting property rights to a resource to a competitor may lead to low value dissipation for a focal firm if it has low rivalry in the ability to leverage that resource (von Hippel & von Krogh, 2003).
What then are the circumstances under which it may be advantageous to freely grant property rights over firm resources to other firms? Benkler (2002) suggests that it may be advantageous to do so when the joint production of firms in the ecosystem will more efficiently assign idiosyncratic human capital to information inputs than could be done either through purely market-based or hierarchical (intra-firm) means. This situation is often the case in the development of information assets, as the costs of information production and exchanges are rapidly declining in terms of physical capital, communications, and information input costs, leaving human capital costs as the remaining opportunity for cost optimization (Benkler, 2002). As Benkler (2002) put it: “markets and hierarchies are both relatively lossy media when applied to questions of human capital, primarily in terms of creativity, ability, motivation and focus. This information is uniquely in the knowledge of individuals and is immensely difficult to measure and specify in contracts for market clearance or for managerial allocation of resources”. A joint-production model, instead, allows firms to self-identify for tasks based on the talents of their employees, maximizing their productivity. The situations favouring different strategies of production organization are described in table 1.

In order for the open source strategy to be successfully executed, two additional conditions need to be met. The first condition is that the resource to which property rights are granted should be non-rival, i.e., using it does not diminish its utility to the subsequent user. It should also be non-excludable such that all potential actors can have simultaneous access to it. These properties are inherent to most knowledge-based resources. The second condition is that the focal firm that owns the property rights over the resource must focus its strategy on leveraging a complementary resource to the shared one in order to establish and maintain its competitive advantage in the ecosystem. This complementary resource might be knowledge or capability that enables it to utilize the shared resource in ways other firms cannot. Or, it may be brand, reputation, production, value-chain, or network effects that allow the focal firm to shape the industry in such a way that it is positioned to acquire the lion’s share of the value that is jointly created (Lecoq & Demil, 2006). This capture potential, itself, can act as an ex post barrier to competition (Peteraf, 1993), leading to increase rents for the focal firm.
The important strategy implication of this extension of existing theories can be summarized by the idea that an “effective open strategy balances value capture and value creation, instead of losing sight of value capture during the pursuit of innovation” (Chesbrough & Appleyard, 2007). In other words, property rights are an important part of strategic decisions about resources, but too much focus on rigidly protecting them can lead both to extensive transaction costs and loss of total capturable value. When asked about its investment into Linux, the freely available open source operating system, IBM’s VP of corporate strategy, Joel Cawley explained that “it takes $500M to create and sustain a commercially viable operating system” (Cawley, 2006 in: Chesbrough, 2006) on an annual basis. IBM invests about $100M per year and other commercial developers contribute $800-$900M per year. Even accounting for the portion of development that is exclusively for the specific needs of those companies, the net result is an extra $400M per year of cost-savings value that comes to IBM that was created through the joint development process. By allowing others unfettered access to its property rights over the resources related to the open source development, IBM has magnified the total value that is created to levels that it could not create on its own. IBM can then acquire much of this value by pairing the operating system with its server products and services and selling them as a bundle (Chesbrough & Appleyard, 2007).
The described IBM scenario is far from unique. Open strategies are presently being executed in various forms by large firms around the world, including Google, Facebook, Nokia, and even Microsoft. As Chesbrough and Appleyard (2007) point out, “if we are to make strategic sense of innovation communities, ecosystems, networks, and their implications for competitive advantage, we need a new approach to strategy – open strategy”. The literature needs to continue adapting the extant strategy theories to account for these circumstances. It is my hope that the present short paper has stimulated that effort.

References

Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management. 17: 99-120.

Benkler, Y. 2002. Coase’s Penguin, or, Linux and the Nature of the Firm. Yale Law Journal. 112 (3): 369-446.

Chesbrough, H. W. 2006. Open Business Models: How to Thrive in the New Innovation Landscape. Harvard Business School Press: Boston, MA, USA.

Chesbrough, H. W., & Appleyard, M. M. 2007. Open Innovation and Strategy. California Management Review. 50 (1): 57-76.

Foss, K., & Foss, N. J. 2005. Resources and transaction costs: how property rights economics furthers the resource-based view. Strategic Management Journal. 26: 541-553.

Lecocq, X., & Demil, B. 2006. Strategizing industry structure: the case of open systems in a low-tech industry. Strategic Management Journal. 27: 891-898.

Lerner, J., & Tirole, J. 2002. Some Simple Economics of Open Source. The Journal of Industrial Economics. 50 (2): 197-234.

Peteraf, M. A., 1993. The cornerstones of competitive advantage: a resource-based view. Strategic Management Journal. 14 (3): 179-191.

von Hippel, E., & von Krogh, G. 2003. Open Source Software and the “Private-Collective” Innovation Model: Issues for Organization Science. Organization Science. 14 (2): 209-223.

posted by Mekki at 5:42 pm  

Wednesday, August 25, 2010

Let’s Talk About This – A Gamer View Examining Game Purchasing Business Models

In a recent article, Cory Ledesma, the creative director for wrestling games at THQ, is quoted as saying that the used video game market “cheats developers”.  He goes on to say,

“[L]oyal fans who are interested in buying the game first-hand are more important.   I don’t think we really care whether used game buyers are upset because new game buyers get everything. So if used game buyers are upset they don’t get the online feature set I don’t really have much sympathy for them. We hope people understand that when the game’s bought used we get cheated.”

The Internet exploded in furor, as this comment comes in the context of numerous companies moving into the used video game market, including Best Buy and Walmart, and new games often costing $60 or more.

Mike Krahulik, of Penny Arcade, known to many as Gabe, who was recently included in Time Magazine‘s list of Top 100 most influential people, tweeted and posted comments on his blog on the topic, which has proved to be quite controversial.  He issued a call to gamers and developers to give their take on the issue.  Below is my response to Gabe on the subject:

Hi Gabe,

I’m a gamer (over 20 years).  I’m also a PhD researcher in business strategy, and am really interested in gaming (and open source) business models (which share many commonalities).  Here’s my take:

The problem (for me) with your comment,

“not saying you can’t buy used stuff. just when you buy a used game you
are not supporting developers. If that matters to you is your choice.”

is that it implies that the gamer, alone, is responsible for the revenue source that developers have.  It says to gamers that there is one way to support developers because of “industry forces”, and if you don’t like it, you’re not supporting them.  It binds the customer to the business model that game developers have chosen, and makes customers responsible for the shortfalls of this business model, of which the used game market is one.

It is similar to the RIAA insisting that there is only one way to support “artists”, and that if you want to do things differently, you are putting artists in the poor house.  There are lots of analyses that have shown that the decline in music sales is not the “fault” of music lovers, but rather a problem with the evolution of the music industry’s business model.

It’s the same here.  If used game sales are a problem for developers in the gaming industry, like the Internet is a problem for RIAA-era media companies, then it’s time to change the business model so that developers can get more revenue.  This change isn’t the responsibility of gamers.  It’s the responsibility of the developers. Developers have to come up with creative an innovative ways to offer direct value to gamers in a way that cuts out the obsolete parts of the business value chain.

As a gamer, I don’t feel it’s my responsibility to pay $60+ for a new game to “support developers” because, as in the music industry, the lion’s share of that money is going to intermediaries (Best Buy, distributors, production companies, EA, etc.). And I have no control over this value chain, or the business model that set it up.  For every $60 I spend on a new game, the “developers” maybe get a couple of dollars.  This model comes from an era when creating, producing and distributing games (like music in the 20s-30s) was prohibitively expensive. This is no longer the case.

I *will* spend $20 on a new indie game on Steam, knowing that a much larger share of that money goes to the developers. This example shows how new vs used misses the point, and that it’s more about the value-generation channels.  It explains the success of Popcap Games, and others who are changing their business model away from what the mega-studios are doing, to accommodate the change in attitude and definition of value. I could refine this much further, but for brevity’s sake let’s keep it at that.

In summary, I think this is more about business models, value chains, and adapting to evolving definitions of value than it is about “new vs used”.  Gamers by and large want to support developers, but restricting them to a single way of doing that makes no sense, and doesn’t help anyone but the corporate giants. We can come up with smarter business models than that for the game industry.  If we can do it for open source products that are often available at no cost (legally!)–this is my area of expertise–we can figure it out for game companies too.  And I’d like to help. I think research needs to be done in this area to figure out how to overcome the growing pains of the gaming ecosystem.

posted by Mekki at 1:37 pm  

Friday, June 4, 2010

Letter to Parliamentarians on Bill C-32 (2010)

Jun 04 2010

The Honourable Tony Clement
Minister Of Industry, Science & Technology
House of Commons
Ottawa, Ontario
K1A 0A6

The Honourable James Moore
Minister of Canadian Heritage and Official Languages
House of Commons
Ottawa, Ontario
K1A 0A6

The Right Honourable Stephen Harper
House of Commons
Ottawa, Ontario
K1A 0A6

Dear Ministers,

Having reviewed the recently tabled Bill C-32, I would like to
express my concern about the Digital Lock provisions and
insufficient Fair Dealings provisions.

Specifically, the bill sought to strike a balance between
the rights of copyright holders, and Canadian Citizens.
Numerous provisions were included to balance these rights.
The digital lock anti-circumvention provision COMPLETELY
REVERSES all of these forward looking provisions by putting
ALL of the power in the hands of copyright holders, and NO
power in the hands of Canadian Citizens.  It unduly restricts
libraries, educational institutions, cultural organizations,
students, teachers, remixing artists, and dozens of other 
groups.  It will completely crush innovation and new 
artistic development in Canada.  

Further, the fair dealings provisions are insufficient.
And expanded, non-exhausted \"example\"-type list should be
included, with wording that allows for broad interpretations
as new media, technology and creativity come up with new ways
of exercising fair dealing rights in the future.

I ask that you seriously consider amending these sections of
an otherwise quite strong bill.  While the bill is generally
strong, I cannot support it with the above provisions, as they
completely reverse the spirit and intent of the bill.

Sincerely,

 Mekki MacAulay
 26-920 Dynes Road
 Ottawa
 Ontario
 K2C 0G8
 parliament@mekki.ca

CC: The Honourable Michael Ignatieff
CC: Marc Garneau - Official Opposition Critic For Industry,
Science & Technology
CC: Pablo Rodriguez - Official Critic For Canadian Heritage and
Official Languages
CC: Charlie Angus - NDP Digital Affairs Critic
CC:  Dewar.P@parl.gc.ca
posted by Mekki at 10:24 am  

Tuesday, June 1, 2010

Growing Revenue with Open Source, Mekki MacAulay

Below is the published version of my article for the June 2010 issue of OSBR.  It can be found on the OSBR site here.

This version has a slightly different focus, with examples of specific company implementations of these strategies as the core of the article.

Editorial:

The editorial theme for this issue of the OSBR is Growing Business. Authors from academia and industry share their research and experiences on how to grow a successful business in a world that is increasingly embracing open source. They provide growth strategies that leverage the advantages of open source, and blueprints for company activities that lead to growth in revenue. The issue provides lessons on how to leverage an open source product as the keystone of a company; how to engage an open source community to support a company’s growth; selecting a growth strategy that is best depending on the company’s core business; and, the challenges that startups face as they start to grow.

Growth is important for any business, especially technology companies that operate in an environment of constant innovation, advancement, and evolving consumer needs. It is essential to maintain long term profitability, develop a brand, and attract new investment. But the path to successful growth is not obvious, and is filled with hurdles. Growth requires capital, making consistent revenue a necessity. But figuring out the smartest way to invest capital to promote growth can be a daunting task. Growth can also require some experimentation with different stategies, weathering the occasional failure along the way, in order to find one that is the right fit for the company. But where do you start?

Book stores have hundreds of books on business growth, with many promising a surefire strategy for success. But the reality is that there is no single growth formula that works for all businesses. Entrepreneurs must understand what drives their business–something that might be very different from other, similar businesses–and leverage this knowledge in order to grow. Growth requires focus, and energy must be directed on one particular aspect at a time, such as revenue growth, market growth, product line growth, or even shareholder growth. Trying to extend in all directions at once is a sure path to failure. Disciplined, incremental, consistent growth is the formula for success, no matter how that success is defined by the business.

Article:

The rules of the game are continually changing. It’s no wonder that participants are now particularly receptive to the siren song: ‘Discard the old, leave your historic core business behind and set out for the promised land’. Sometimes this advice leads to the right course, yet usually it does not solve the fundamental problem and can even aggravate the underlying cause of inadequate profitable growth. The key to unlocking hidden sources of growth and profits is not to abandon the core business, but to focus on it with renewed vigor and a new level of creativity.”

Chris Zook & James Allen

To survive, a company must grow revenue from the core of their business. This article describes how open source can be used to help support revenue growth. We suggest seven strategies and provide examples of successful implementations for each.

Ways Companies Can Use Open Source to Grow Revenue

Growing revenue is a challenge for most companies. The selected growth strategy should complement the core business. Open source, carefully applied, can help improve revenue growth potential by leveraging increased adoption, community participation, strategic partnerships, and optimizing product positioning. This section reviews seven ways a company can use open source to grow revenue and provides examples of successful implementations.

1. Sell services to government agencies that collaborate with the company to contribute code to an open source project. A company can jointly develop open source software with a government agency. The company benefits from the innovation and development work of the government agency and earns revenue by selling support and consulting services and developing specific features for the agency and other customers with similar needs. One advantage to this type of collaboration is that the government agency is not likely to become a direct competitor to the company. European governments are leaders in the adoption of open source. There have been rumours for some time that the US government will be following suit, opening the door for new opportunities.

2. Sell more of a product that depends on open source. A common strategy is to use open source as a means of increasing the value of a primary, closed product. This approach is often leveraged by hardware manufacturers that have an embedded software component. Since the hardware, not the software, is their core business, opening up the development of the embedded software can promote the use of the hardware and provide a competitive advantage over other hardware vendors.

For example, the core business of Nokia is to develop and sell cell phones. Nokia recently acquired the Symbian cellular phone operating system and promptly released it as open source. By allowing the open source community to improve the operating system, Nokia increases the value of its cell phone. A larger number of developers will advance the cellular phone operating system and Nokia will be able to bring more features and services to its customers, leading to more sales revenue.

3. Sell proprietary products built on top of an open source platform and capture the brand value that results from leading the development of the platform. A company can lead the development of an open source platform and sell the proprietary products it builds on top of the platform. As the open source platform grows it creates brand value for the company that leads its development. The brand becomes a valuable asset for the company. Sometimes the value of the brand exceeds the revenue that the company receives from the sale of its products built on top of the open source platform.

This approach to growth allows the company to focus on the differentiations for which customers are willing to pay and monetize the value of the brand that results from leading the development of the platform.

The Sun Microsystem’s (now Oracle) Java platform is an example of such an approach to growth. The Java brand enjoys high recognition and is associated with a broad range of products and services, from desktop applications, to web services, to cell phone games. Sun’s open source platform development strategy led to the effective creation of a “new product” for the company in the form of a brand, and they captured value through the lucrative licensing of the brand.

4. Sell more products by adapting language, interface, and features to different geographies and linguistic environments. This approach to growth entails reaching new geographies with existing products/services whose language, interface, and features have been adapted to be suitable to different geographies and linguistic environments. To implement this approach the company first modularizes all the regionally-specific components into a generic framework called a locale. Locales can be developed by participants in underserved markets who would benefit from access to products/services that weren’t initially written for them. Mozilla’s Firefox web browser is one of the most successful examples of such a growth approach. It has locales available for over 70 different languages and regional needs. It is likely that this localization strategy played a role in its rapid adoption, grabbing a sizable share of new markets where localized versions of Microsoft’s Internet Explorer were not available. Figure 1, from Mozilla’s Q1 2010 Analyst Report on the State of the Internet, shows the international usage statistics for Mozilla Firefox, highlighting the success of its localization efforts.

Figure 1: Firefox Worldwide Market Share

5. Sell new products and services in one place of the supply chain while concurrently introducing open source software in another place of the supply chain. A supply chain is a set of companies that work to progressively refine a product/service from basic principles, such as raw materials or consulting, until it is ready for consumption by an end user. Each company in the chain adds some value to the product or service and, in turn, extracts some value from the supply chain. This value extraction is not uniform as different companies at different places in the supply chain extract different amounts of value. In a vendor dominated supply chain, there is one company that extracts the lion’s share of the value. Yet, this position is precarious. If it extracts too much value, there may not be enough resources to support the rest of the supply chain which could collapse. Such a collapse can happen even when there is high demand, especially if a product/service is disrupted. The key to company survival and growth is to gradually move towards the most profitable place in the supply chain, the place where the most value can be extracted.

One approach to shifting the value extraction point in the supply chain is to introduce an open source product/service that is positioned to compete with products offered at that level of the supply chain. This introduction is effectively signaling to the market that, since an open source product is replacing a paid product, the value-added is elsewhere in the supplier chain. This may lead to a devaluation of the other products at that position. The core business must, at the same time, focus on research and innovation to introduce new products/services that refocus and capture customer attention. This diversification strategy leverages the loss leader open source strategy, while positioning the loss leader elsewhere in the supply, outside of the core business, insulating it from devaluation effects.

This strategy is being experimented with in the Netbook supply chain. Several Netbook manufacturers have moved to release open source embedded operating systems for their devices that offer basic functionality such as web browsing and media playback. This strategy is testing the ability to weaken Microsoft’s dominant position in the supply chain while funneling the value to device manufacturers who previously could only extract a small percentage of the total value generated by the supply chain.

Greg Wallace describes a similar effect in the customer relationship management (CRM) system supply chain based on the strategic choices of open source company SugarCRM. By moving the focus away from hardware and software and towards value added services in the CRM supply chain, SugarCRM positioned itself as the leader in customization services, its core business, extracting the lion’s share of revenue from the supply chain. Figure 2 describes the evolution in the CRM supply chain in terms of value.

Figure 2: Evolution of CRM Supply Chain

6. Open source a legacy product that is no longer generating sales. Software evolves quickly. New versions are released all the time, and new products replace old ones. Companies that have been around for a while will have a library of older titles that they developed and sold in the past which have since become obsolete, or are otherwise out of date. These older products are perfect candidates for open sourcing. The best way to open source them is to leverage a strong distribution channel, such as an online service, and to sell the complete product, documentation, and code as a single package for a significantly reduced price. The low price will lure customers who are interested in the product for personal research, interest, and nostalgia. By combining everything in a single place, from an authoritative source, even if the now-open-sourced product becomes available elsewhere at no cost, customers are likely to pay the small amount of money to purchase through the authoritative source.

The best current example of this strategy is Id Software which has a policy of releasing its games as open source under the GPL open source license five years after their initial release. This strategy has led to continuous sales of their legacy, open-sourced titles through their website, Microsoft’s Xbox Live content distribution service and Valve’s Steam distribution service, with some games still selling well over a decade after their initial release. It has also led to a large community following for Id Software games, with numerous ports, expansions, and other value-added components being developed for free by the community, adding value to the games themselves. This strategy also draws attention to the latest games that Id Software releases, increasing their sales.

7. Open source a transactional product. With the evolution of the Internet into a near-real-time, transactional network, products with distributed components that rely on network services have become common place. The businesses that develop these products maintain a network infrastructure or complex database structure and generate revenue from the product transactions that use these services. By releasing a transactional product as open source, a company can increase revenue generated by the user transactions by increasing adoption of the product. This front end provides access to the network services, and may even provide access to basic services at no cost to develop a user base. The value of the service is based on the strength of the network or data mining possibilities with the database, and, as such, the company is protected from imitation by competitors who might adopt the open-sourced front end.

There are several examples of this strategy in industry. Linden Labs, the makers of the popular virtual world Second Life, have released their Viewer and Snowglobe development environment as open source. This strategy has attracted attention from developers and new users alike. Linden Labs generates most of its revenue from services such as item sales and land transactions within the virtual world, so releasing programs used to access its services leads to an increase in their revenue potential. The revenue increase following the open source move has been substantial, with an increase of user-to-user transactions of over 65% year over year.

There have been rumours that voice over IP giant Skype will soon be releasing its client as open source. Such a move would also fit with this model, as Skype generates its revenue not from sales of its software, but rather from network services. By open sourcing its software, it would be opening the door to novel uses of its network services, increasing its revenue.

Conclusions

Growing revenue is challenging and an open source strategy can help companies attain their growth goals in novel ways. This article reviewed some of the strategies that have been successfully implemented by industry participants. They can serve as a starting point for companies to plan out a strategy that will successfully fuel their revenue growth while supporting their core business.

posted by Mekki at 2:17 pm  

Tuesday, June 1, 2010

Open Source Growth: How Open Source Can Support Traditional Growth Strategies, Mekki MacAulay

This is the draft version of an article I wrote for the June, 2010 issue of OSBR (www.osbr.ca)

“The rules of the game are continually changing. It’s no wonder that participants are now particularly receptive to the siren song: ‘Discard the old, leave your historic core business behind and set out for the promised land’. Sometimes this advice leads to the right course, yet usually it does not solve the fundamental problem and can even aggravate the underlying cause of inadequate profitable growth. The key to unlocking hidden sources of growth and profits is not to abandon the core business, but to focus on it with renewed vigor and a new level of creativity.” Chris Zook & James Allen

Carefully selected open source strategies can help support business growth. By focusing on its core competencies, its competitive advantage, and current market successes, a company can use open source strategies to improve its ability to expand its product base, reach new markets, and diversify through vertical integration. This article discusses three traditional business growth strategies and highlights how an open source angle can help improve their effectiveness, without compromising the core business.

Growth from the Core

Companies must grow to survive, and stay relevant to their customers, investors and employees. Most companies that don’t grow cease to innovate, become stagnant and eventually either cease to be relevant, or go out of business. But growth is a painful process, one that is difficult to navigate. There is a long list of once successful companies that tried to grow and failed, destroying the value they had developed in their core business. It can be tempting, especially for young companies, to jump on the latest trends, or blaze trails into new markets, but this strategy, as Zook and Allen remind us, can lead to a quick demise. Open source, with its promise of quick development cycles, accelerated customer adoption, and low cost can be a component of a viable growth strategy, but businesses must resist the siren call to discard their core business.

Every successful business is based around core products and/or services, customers and competencies. This core is the foundation of the business, and its structural pillar of value generation for all of its stakeholders, investors, customers, and employees. A strong core affords a company cash flow to support its growth efforts, which can be time consuming and expensive. It gives the company a staging ground from which to plan its growth. And, most importantly, it defines the company, its profile, goals and values, all of which are important in long term strategic growth. At the most basic level, the core of a business is what it “knows” and “does really well”. It is what creates value, maintains competitive advantage, and motivates the company to grow.

Growth doesn’t come on its own; it must be earned. Companies earn the right to grow by developing their core business to a point where it is self-sustaining, has relevant products/services with an established customer base and notable market share. Companies that haven’t yet reached this point cannot yet afford to spend their precious resources on growth, and should instead first focus on solidifying the core. Once the core is stable, and the company has the leeway to focus its attention on its next stage of evolution, it is ready to grow. There are several strategies that allow companies to grow without extending too far from their core.

Growth Strategies

There are three major growth strategies that were first described by Igor Ansoff in his 1957 Harvard Business Review article (Strategies for Diversification, Harvard Business Review, 35(5), Sep-Oct 1957, pp.113-124). He explained the dimensions of expansion from a core business with successful products/services and an existing client base. Figure 1 (Adapted from Ansoff, 1957) describes the dimensions of growth from a core business.

Figure 1: Growth Strategies from Core Business

Image:AnsoffMatrixUpdated.JPG

The first strategy is new product/service development: selling new products/services to the same customer base. This strategy leverages the current customer base, target market demographics, and accessible geographies of the core business and focuses on finding new products/services that meet the current and future needs of customers. This is one of the most common growth strategies and has numerous advantages: the primary one being the ability to query the existing customer base for pain points that have not yet been addressed by an existing product or service. Working with existing customers can yield innovative ideas and help chart out the growth path of the company. It spurs innovation in the company, which can lead to discoveries and advances that solidify and build the company’s stakeholder value and long term industry relevance.

The second strategy is market expansion: selling the same products/services to a new customer base. This strategy leverages the product/service expertise that the company has honed through its core business and focuses on bringing the products/services to new customers in new markets that have previously gone unserved by the company. This strategy’s primary advantage is that it allows the company to focus all of its energy on acquiring new sales instead of research and development. It takes successful products/services and reaches out to new customers who were not previously part of the target market. One of the best ways to execute market expansion is to expand the company into new geographies, such as new cities, provinces, or countries. This expansion may lead to minor tweaks and regionalization of the products/services, but does not stray far from the core business.

The third strategy is diversification: expanding into new businesses, most often through vertical integration in the supplier chain. Most companies that are in a position to grow are part of a supplier chain that funnels a raw product/service and progressively refines it until it reaches the client. A vertical integration strategy is effectively a combination of the previous two strategies that still leverages the core business. It proposes expanding into a new customer market where the new customer is the current core business. This approach is advantageous as the needs of the customer are well understood. It proposes new products/services at the same time, where the new products/services are those that are consumed by the core business. This approach has the advantage in that the pain points that the products/services address and use of these products/services are well understood. By acquiring a company upstream in the supplier chain, a successful intermediary can expand its influence and control over the supplier chain while acquiring more of the net value created in the chain.

Open source can play a creative role in each of these strategies to improve their effectiveness and likelihood of success.

Open Source and Growth via New Product/Service Development

New product/service development implicitly implies innovation. Traditionally, innovation occurs through internal research and development, requires time and effort, and very few ideas make it all the way to the customer. Increasingly, companies are moving towards an open source innovation strategy to address some of these issues. In his 2003 book Open Innovation (http://www.openinnovation.net), Henry Chesbrough compares the traditional model of closed, intra-company innovation and open innovation principles. Table 1 compares these principles.

Table 1: Comparing Closed vs Open Innovation Principles

Image:Mekki2.jpg

The advantages of an open source innovation strategy are clear: there are numerous existing product/service ideas, allowing a company to identify new opportunities and capture a portion of the value generated without having to generate the ideas from scratch. This strategy allows the company to focus its resources on the correct execution of the idea that leads to a product/service.

Open innovation principles lead to strategies that complement, and depend on, the core business. The focus shifts away from coming up with innovative products/services to positioning the company to acquire value from existing product/service ideas. Depending on the core business, the best way to acquire value from an existing idea may be through the ability to deliver that idea better than anyone else to an existing market. Such an approach leads to a distribution focus. Another core business might have strengths in development and may take a base idea and improve it threefold, selling a new and improved version to an underserved market. Such an approach leads to a development focus.

In some cases, it is possible to take the open source strategy even farther, right through to collaborative and distributed development. This is possible where the core business has a positioning that can partner with customers, or other industry participants who are not in direct competition, to work collaboratively on product/service development for mutual gain. A common example is partnerships between a company and a government agency. By opening up new product/service development to participation by a government agency, a company can benefit from the free innovation and development work of the agency, while earning revenue through support services, specific feature development, and in-depth product expertise–all the while safe in its knowledge that a government agency is not likely to suddenly go into the product/service business in direct competition.

This approach can also lead to mutually profitable associations in a broader, more distributed context. In such models, the products/services that are collectively designed and developed in the open source community are at one participation layer for the company seeking to grow. The growth takes place at a different layer, typically with revenue-generating services overlaid on the new product/service development. The new product/service development becomes an extension of the core business that improves its revenue generation potential. One example is the Symbian (http://www.symbian.org) cellular phone operating system which Nokia recently acquired and promptly released as open source. The core business of Nokia is selling cell phones. By engaging in new product development and improvement of Symbian, and allowing the community to improve it via distributed development, Nokia increases the value of its cell phone production, bringing more features and services to its customers. Such an approach can lead to company growth just as surely as if they had developed a whole new cell phone from scratch.

Another successful open source strategy for new product/service development hinges on the idea of distributed platform development. This strategy focuses on building and offering new products/services that meet a specific need, such as that of the customers of the core business, by creating a platform that is shared by other developers who target other customer markets. It protects the company’s core business by modularizing and opening a portion of the product/service that is not the core competency of the business and not part of its competitive advantage. This approach allows the company to focus on its value-add (its competitive advantage) while effectively outsourcing the foundation upon which it is built. It also allows the company to develop and leverage a brand surrounding the platform. This brand becomes an asset whose value could exceed traditional products/services. An example of such platform brand value is Sun Microsystem’s (now Oracle) Java platform. The Java brand enjoys high recognition and is associated with a broad range of products and services, from desktop applications, to web services, to cell phone games. Sun’s open source platform development strategy led to the effective creation of a “new product” for the company in the form of a brand, and they captured value through the lucrative licensing of the brand.

Open Source and Growth via Market Expansion

When seeking to expand into new customer markets, one of the biggest challenges is customer adoption. An open source strategy can help improve the adoption of a product (and, in turn, an overarching service) in a new market through viral redistribution. By encouraging end users to redistribute the product, a world of mouth effect quickly leads to exponential increases in awareness, the first step in market penetration. Companies must be careful to pay close attention to the market response immediately after a product release as the needs of this new market may be substantially different from the needs of the market that was previously addressed by the core business. This strategy works particularly well if the core business operates at different layers, where one product, or part of a product, can be open sourced to bring new clients to the company. This way, revenue is still generated by the other parts of the core business, be it support services, network infrastructure, or complementary products. The open source product will bring the new market to the company, and the core business has to deliver something of value to that new market in order to capitalize on the new market. An example of such value is releasing a basic, open version of a product to a new, overserved market, and offering a fully-featured closed version of the product to customers who require additional functionality. This strategy can lead to increased brand recognition and can devalue competing products, both of which can lead to market expansion.

One way to reach new geographies with existing products/services is to localize them by adapting the language, interface, and features to be suitable for a different geographic and linguistic environment. This process can be time and resource consuming and, to be successful, it is important that the company understands the specific linguistic, cultural and functional needs of unfamiliar markets. One way to address these challenges is to open up the product/services for distributed, collaborative localizing, typically by modularizing all the regionally-specific components into a generic framework called a locale. Locales can be developed by participants in underserved markets who would benefit from access to products/services that weren’t initially written for them. Mozilla’s Firefox web browser is one of the most successful examples of such a strategy, with locales available for over 70 different languages and regional needs. It is likely that this localization strategy played a role in its rapid adoption, grabbing a sizable share of new markets where localized versions of Microsoft’s Internet Explorer were not available. Figure 2, from Mozilla’s Q1 2010 Analyst Report on the State of the Internet (http://blog.mozilla.com/metrics/2010/03/31/mozillas-q1-2010-analyst-report-state-of-the-internet), shows the international usage statistics for Mozilla Firefox, highlighting the success of its localization efforts.

Figure 2: Firefox Worldwide Market Share

Image:FirefoxWorldUsage2010.PNG

Open Source and Growth via Vertical Integration

A supply chain is a set of companies that work to progressively refine a product/service from basic principles, such as raw materials or consulting, until it is ready for consumption by an end user. Each company in the chain adds some value to the product or service and, in turn, extracts some value from the supply chain. This value extraction is not uniform as different companies at different places in the supply chain extra different amounts of value. In typical supply chains, there is one company that extracts the lion’s share of the value. Yet, this position is precarious. If it extracts too much value, there may not be enough resources to support the rest of the supply chain which could collapse. Such a collapse can happen even when there is high demand, especially if a product/service is disrupted. The key to company survival and growth is to gradually move towards the most profitable place in the supply chain, the place where the most value can be extracted. An open source strategy can help with this supply chain positioning by acting as a funnel of resources to the desired value extraction point in the supply chain. This strategy must be carefully executed in order to not destroy the core business.

One approach to shifting the value extraction point in the supply chain is to introduce an open source product/service that is positioned to compete with products offered at that level of the supply chain. This introduction is effectively signaling to the market that, since an open source product is replacing a paid product, the value-added is elsewhere in the supplier chain. This may lead to a devaluation of the other products at that position. The core business must, at the same time, focus on research and innovation to introduce new products/services that refocus and capture customer attention. This diversification strategy leverages the loss leader (http://en.wikipedia.org/wiki/Loss_leader) open source strategy, while positioning the loss leader elsewhere in the supply, outside of the core business, insulating it from devaluation effects. This strategy is being experimented with in the Netbook supply chain. Several Netbook manufacturers have moved to release open source embedded operating systems for their devices that offer basic functionality such as web browsing and media playback. This strategy is testing the ability to weaken Microsoft’s dominant position in the supply chain while funnelling the value to device manufacturers who previously could only extract a small percentage of the total value generated by the supply chain.

Greg Wallace describes (http://linux.sys-con.com/node/173425) a similar effect in the customer relationship management (CRM) system supply chain based on the strategic choices of open source company SugarCRM (http://www.sugarcrm.com). By moving the focus away from hardware and software and towards value added services in the CRM supply chain, SugarCRM positioned itself as the leader in customization services, its core business, extracting the lion’s share of revenue from the supply chain. Figure 3 describes the evolution in the CRM supply chain in terms of value.

Figure 3: Evolution of CRM Supply Chain

Image:CRMSupplyChainExample.jpg

In Closing

Growth is challenging. While open source strategies can give a competitive edge, not all circumstances and companies can leverage these strategies. They are highly dependent on the nature of the core business, the products/services offered by the company, its environment, customers, and supply chain. Every company is different and should devise a strategy that is the right fit for its situation and goals. An open source strategy should be looked at as another tool in the toolbox of strategic growth planning, and not as a one-size-fits-all roadmap.

posted by Mekki at 12:09 pm  

Monday, February 15, 2010

OS Adoption Faces Similar Challenge to Vaccine Addoption

It occurred to me that when we examine OS Culture, and the culture of resistance to change, the challenges are similar to those faced by the medical communities in convincing people to get vaccinated against illnesses.

It is at this junction where logic and empirical evidence no longer sway adoption that the interesting research needs to be done.  Current efforts on OS adoption focus on logical reasoning, and empirical evidence of successful adoptions, ROI, more stable, safer, better applications; but where they fail is in the “warm fuzzy” feelings of the adopters.

Evidence shows that vaccines are the single most effective means to reduce propagation of diseases and likelihood of infection, yet people resist them, devising wild conspiracy theories to support their fears.  In my experience, discussing OS adoption is much the same.

Recently, the Bill and Melinda Gates foundation made the single largest donation in the history of philanthropy, targeted specifically at the development of new vaccines.  The foundation makes a stand to only support empirically-based research and missions.  This approach is very challenging in the face of large lobby groups for diseases that, while horrible, kill far fewer people than some that receive less press coverage.

OS Culture needs to learn lessons here.  And there are numerous cross-discipline research opportunities.

posted by Mekki at 1:38 pm  

Thursday, February 11, 2010

Looking for Details about OSStrategy.org?

Looking for Details about the consulting company OSStrategy.org?

Check back soon to http://osstrategy.org for the new company website!

posted by Mekki at 4:15 pm  

Monday, February 1, 2010

The Business of Open: Common Pitfalls for Open Source Startups

As published in this month’s OSBR:

The Business of Open: Common Pitfalls for Open Source Startups, Mekki MacAulay

“Open Source requires a willingness to acknowledge what others may see as mistakes in strategy. It goes beyond merely engaging with your community, to treating critics as adults rather than as adversaries, and questions as opportunities to provide insight. A willingness to listen and even change your mind in response to criticism is not something we see in many entrepreneurs. Is it an essential part of the open source business toolkit?”

Dana Blankenhorn

Many entrepreneurs look at open source as a panacea of sorts, a golden ticket to success. They assume that the value of the open source approach is apparent to all, undeniable, and the only way. The mistake they often make is carrying this passion into the way they form their startup. They assume that open source startups are somehow different, and that as a result they will carry themselves. I was once such an entrepreneur, with such a vision.

The reality is that an open source startup isn’t really that different from other startups. It still needs to have figured out all of the essential components of a successful business. An open source strategy can certainly yield a competitive advantage, bringing faster time to market, lower development cost, collaboration opportunities, ecosystem positioning, and faster adoption. But, these advantages don’t come along on their own. The open source strategy is just one piece of the larger business model. The other pieces have to be strong, too, or the whole might crumble. This article reviews the essentials for all startups and highlights special considerations and pitfalls for open source startups in particular. It also discusses how startups can use an open source strategy to gain competitive advantage by focusing the passion and energy surrounding participation in open source towards value creation and acquisition.

Are Open Source Startups Different?

One of the greatest challenges for entrepreneurs who are passionate about open source is understanding that investors and customers probably don’t care that an open source approach is being used. They care about their needs, and what value a company and its offerings bring to them, at what cost, and at what risk. If you can create value for your customers or investors better or more efficiently using an open source approach, great! But the open source approach is not an end of its own.

This concept is enshrined in the founding of the Open Source Initiative as a separate entity from the Free Software Foundation, and the use of the term “open source” instead of “free software”. Eric S. Raymond describes it succinctly: “[T]he term [free software] makes a lot of corporate types nervous. While this does not intrinsically bother me in the least, we now have a pragmatic interest in converting these people rather than thumbing our noses at them. There’s now a chance we can make serious gains in the mainstream business world without compromising our ideals and commitment to technical excellence — so it’s time to reposition. We need a new and better label”..

A focus on the benefits of open source makes customers and investors nervous. The fact is they have their own businesses and portfolios to deal with, and while they might find the goals of the free and open source movements laudable, these goals are not their concern.

At the recent Lead To Win session, I was fortunate to overhear an exchange between an entrepreneur who was pitching an open source startup and a seasoned industry veteran who was coaching him on how to improve his business strategy. The exchange went something like this:

Industry Veteran: “I would never use the open source product your company pitches in my business because the risk is not worth the few hundred dollars I would pay Microsoft in licensing fees for their industry-leading product.”

Entrepreneur: “But my open source product is better than Microsoft’s product!”

Industry Veteran: “You might think so, but I can’t afford to be an early adopter. It’s safer for me to use industry-leading products that I know have been road-tested.”

Entrepreneur: “The US Military uses the product. There’s no risk!”

Industry Veteran: “Then why doesn’t the product have a higher adoption rate?”

Entrepreneur: “Because Microsoft has done a marketing campaign of disinformation to discredit the product and promote their solution as better.”

At this point, the industry veteran’s eyes glazed over as he realised that his message wasn’t getting through to the passionate entrepreneur. The lesson here is simple: from the perspective of business people, Microsoft is the market leader in many areas of software. Open source startups cannot compete with or reverse what millions of marketing dollars have accomplished. Instead, these startups need to take a more disruptive approach, focusing on niches that have been ignored by the incumbents. Roger Irwin describes the advantage of small companies thus: “In many industries there exists a David and Goliath scenario where large corporations simply do not have the agility to match fresh new startups with new ideas, or small companies who just get lucky with a product that just hit the mark at the right time”.

It is the agility of the startup to come up with new ideas and deliver solutions to niche markets that is its primary competitive advantage against incumbents. Taking them head on is simply not an option.

Essentials of Every Startup

There are some essential items that every startup, including open source startups, has to make sure are rock solid in order to have a chance at success.

The product or service the company will offer must solve an immediate and annoying problem for its customers. The customer must have an “itch” that the startup proposes to “scratch” with an innovative solution. This identified need/solution pair is the primary value proposition to the startup’s customers. Shopify provides an example of a strong value proposition: “Shopify is a hosted application that allows you to set up an online store to sell your goods. It lets you organize your products, customize your storefront, accept credit card payments through payment gateways, track and respond to orders — all without the hassle of running a physical store”.

Free software is an example of a weak value proposition: “Free software is a matter of freedom: people should be free to use software in all the ways that are socially useful. Software differs from material objects—such as chairs, sandwiches, and gasoline—in that it can be copied and changed much more easily. These possibilities make software as useful as it is; we believe software users should be able to make use of them”.

The first proposition speaks directly to customers and explains how the proposed solution will improve their business activities. The second speaks of abstract principles that most customers don’t understand or care about. While the goals of the Free Software Foundation are good, they do not make a good value proposition to customers. They do not address an immediate and pressing need.

The next thing every startup needs is a unique method or novel approach that sets them apart from their competition. This “pixie dust” must be more than a gimmick. It must answer the question “Why would a client pick you over your competition?”. When considering this question, I remember the words of one of my mentors: “There are only two types of business ideas: bad ideas, and ideas that are already being done”. Avoid at all costs the assumption that you have no competition. No matter what the product or service is, you have competition. The competition may just not be obvious because they are approaching the problem from another angle, and their solution looks different than yours. Your pixie dust needs to help you stand apart. Examples of poor approaches are lower cost, free USB key with every purchase, or more features than company X. An example of good pixie dust is Amazon’s “See what other people who liked this bought” feature. It allows customers to shop and discover new products in ways no other competitor who offer the same products can.

With the value proposition well defined, the next step is to describe a reachable, growing market. This target market should be well defined and understood. It is important to answer questions such as “Why will the value proposition resonate with this market?”, “What is the best way to reach this market?” and “What does this market care about?”. Spend some time researching the target market and their business needs. Understand what drives them in their industry, what they view as valuable, and the language they use to describe it.

One of the best ways to get the word out to the target market of the startup and its products or services is to engineer a public relations (PR) campaign. At a recent PR Bootcamp presentation, Matt Brezina coined the phrase “No one cares about your stupid little startup” and went on to explain strategies on how to make them care. It is a tough-love lesson that faces the reality that startups are a dime-a-dozen and most of them fail. It is difficult to get the media interested in yet another startup. But, you can help increase your odds of coverage and improve visibility to your target market.

A key component to every successful startup is the team. Picking the right balance of skills is a bigger challenge for most open source startups, as the founders typically come from a technical background. They are usually really good developers and experts in technology, but usually do not have strong backgrounds in business, marketing, sales, and all the other gears that keep the machinery of a successful startup running. The natural urge is to work with friends and fellow developers. The reality is that the team needs a complementary skill set in order to succeed. Working with friends can introduce an extra layer of stress that may hinder progress and could lead to the failure of the business and the friendships. Consider carefully what schools of thought you want on your team. Most open source startups need to focus on innovation. Be careful when selecting people and resist the temptation to focus on candidates with lots of experience. Experience is useful, but can hinder innovative thought by constraining the mind to focus on how things were done in the past, instead of creative ways to do them more efficiently. Sometimes the most innovative people come from a different field entirely and contribute to the innovative success of the startup with a fresh, unbiased perspective.

Finally, once you have put all the pieces together, make sure to focus. One of the hurdles many open source startups face is entrepreneurial ADD. It is fine to have lots of ideas for products and services, but no business can do everything. Pick one that is viable, and see it through. Be careful to avoid feature glut: the drive to add lots of features to a product before releasing it, without validating that customers even want the features.

Customers Determine Open Source Strategy

When planning how to incorporate open source into the startup’s strategy, the answer to the question “Who is the business for?” should be the driving force for business decisions. There are three typical focuses, with various hybrids possible: i) shareholder driven; ii) customer driven; or iii) employee driven. Each of these different approaches has its advantages and disadvantages with some particular things to note for open source startups.

The shareholder driven model is particularly challenging for open source startups as shareholders don’t like, and often don’t understand, open source business models. The reason is simple: these business models don’t match traditional measures for company valuations, making exit strategies more difficult to figure out. Clean, unambiguous intellectual property is quantifiable. The value of the open source strategy proposition is difficult to quantify because we haven’t fully developed the measures that update the traditional business model to conditions of looser intellectual property management. This uncertainty makes shareholders uncomfortable with open source models. Open source entrepreneurs have to be sensitive to this fact and recognize that a shareholder driven model for their company will require a lot of work, and may not be viable for really novel approaches. Investment capital may be limited, so they may have to focus on bootstrap funding to get their business off the ground.

The customer driven model also presents challenges for open source startups because most customers don’t understand open source. There are frequent misunderstandings about such things as what “free” really means and whether a product with open source code is a security risk to their organization. To deal with these challenges, open source startups should not try to fight the battles themselves, and instead focus on adding value to customers. Speak to customers in their language, and leave the open source part out when it doesn’t add value that they understand. The value of open source in a customer driven model will come in the service delivery, where the open source startup can leverage a myriad of tools at their disposal to deliver better, faster, cheaper services to their clients. The clients don’t need to know how their services continue to work, so long as they do. A customer driven model will also help open source startups in their focus as they have continuous customer input on where to put development effort.

The employee driven model is the most common model for open source startups, but can also be the most limiting. By following the passions of its employees, a startup can develop a strong team that is committed to company success, lower employee churn, and create a rewarding work environment. The cost comes in the risk of alienating shareholders and customers with decisions that don’t meet their needs. This conflict sometimes arises if employees are bent on preserving the principles of the open source movement, at any cost. Open source entrepreneurs should tread carefully and make sure that the strategy is well thought out to avoid such conflicts, and keep all their stakeholders happy.

The Attacker’s Advantage

In their 2003 article, Gans and Stern describe a framework that identifies the central drivers for startup commercialization strategy. They examined the commercialization environment that startups face when translating an idea into a value proposition for customers, and describe the forces that affect startup success. They conclude that the optimal strategy for a startup who is entering a market that has one or more dominant incumbents is based on two factors: i) the ability to preclude effective product development by the incumbent; and ii) the fit of the incumbent’s complementary assets to the new value proposition the startup is offering.

The implications of these findings are particularly important for open source startups, as they are not introducing barriers to effective development by incumbents, or other competition. As such, they have two possible strategies they can employ, depending on the incumbents’ complementary assets.

Where incumbents have strong complementary assets, and are best able to commercialize the results of the open source startup’s innovation, open source startups are in a weak position. They may be able to provide consultative input to the incumbent as specialists in a particular area of innovation. However, they are largely at the mercy of the incumbent and its particular strategy. The startup’s efforts are best spent convincing an incumbent that acquiring them is a sound investment to bolster their complementary assets. More importantly, the startup must be careful to develop a relationship with the incumbent in such a way that it doesn’t become more viable to simply put the startup out of business by investing into comparable innovation or a competing startup. This relationship between the startup and the incumbent is probably the most important factor in predicting success.

The best position for an open source startup is one where the incumbent’s complementary assets don’t add anything to the value proposition from the new technology. This incumbent limitation presents an opportunity for the startup to exploit its innovative leadership to capture a possibly ignored market: the attacker’s advantage. The performance of the startup depends on its ability to stay below the radar and focus on niche markets that the incumbents have ignored. Using this disruptive approach, the open source startup can capture market share from dissatisfied customers, and customers who value different measures than the current path of innovation by incumbents. By consistently undermining the value of the incumbent’s offering through creative destruction, the open source startup can rapidly gain market share. The open source software market has been taking this approach for years, and the success of Firefox, OpenOffice, Linux, and others are key examples. The startup must also make investments in developing its own complementary assets to ensure that its value proposition is compelling and novel, and to enable it to capture as much value as possible. These complementary assets can come in many forms, such as those described in the open source business models in Frank Hecker’s Setting Up Shop.

Success Without Compromising Open Source Principles

Open source entrepreneurs tend to be passionate, and there’s nothing wrong with this passion. In order for an open source startup to succeed, it is not necessary to compromise free and open source principles. Instead, make sure the startup’s strategy is aligned in such a way as to harness the passion of its founders and employees for open source, and direct that passion in a way that adds value to customers and inspires shareholder confidence.

Remember to maintain perspective. The loss of perspective is a common pitfall for startups. It’s easy to get obsessed with things that don’t add value to customers. Listen to your customers and let them help you shape the business as it evolves and grows. Their perspective acts as a sanity check to make sure you haven’t lost yours.

Heed the Linux development motto: “Release early and release often“. This approach jives well with the saying “fail fast”. If your business isn’t going to work out, it is best that you find out early on before you and others are heavily invested. Failure is a reality of startups, and is to be expected. Don’t be afraid of failure. Trying to over-engineer success is like trying to catch lightning in a bottle while spending lots of time and effort on designing the perfect bottle. Instead, accept that there will always be some amount of chance and timing that are out of your control.

Finally, remember that one of the most common open source business models revolves around reputation. By building an open source startup and getting people involved, you are contributing to the open source community in a positive way. If you do this well, and consistently, people will begin to notice. Most open source startup founders come and go from “day jobs” framing their ventures. Even if the startup ultimately doesn’t succeed, the positive reputation for the open source entrepreneur will persist, and it may be an asset the next time around.

posted by Mekki at 11:36 am  

Wednesday, January 6, 2010

What’s the Value of an Eyeball – Passive Participation in Open Source Ecosystems

As published in the January, 2010 issue of OSBR

What’s the Value of an Eyeball? Passive Participation in Open Source Ecosystems, by Mekki MacAulay

I reject the notion that any user is a freeloader or a leech. At the very least, they are vectors for your software, getting it out there in real-world environments to show to other potential users.

Brian Proffitt, Community Manager of Linux Foundation

Passive Participants in Open Source Projects

In her recent keynote speech at OSCON 2009, Kirrily Robert talked about the participation of women in open source projects. She interviewed female participants in two open source projects: Dreamwidth and AO3. She reports: “So, what can we learn from this? Well, one thing I’ve learnt is that if anyone says, “Women just aren’t interested in technology” or “Women aren’t interested in open source,” it’s just not true. Women are interested, willing, able, and competent. They’re just not contributing to existing, dare I say “mainstream”, open source projects.”

What about passive participants? Is contribution to the code base the only way to measure participation in a software project? Gender equity issues aside, is it fair to assume that someone who doesn’t contribute to the code of an open source project is not interested in technology or not interested in open source? Are contributors the only stakeholders in an open source ecosystem? Do they generate all of the value?

Franck Scipion of 55 Thinking talks about numerous other roles for participants in an open source ecosystem. He describes roles that include new user support, collaboration facilitator, know-how sharer, evangelist, trainer, event organizer, donor, and users. From the perspective of code commits, these participants are all passive and these contributions to the open source ecosystem are not measured by the traditional scales. Yet they are clearly doing something important to contribute to the health of the ecosystem. Why are these roles marginalized?

Bill Snyder at InfoWorld writes about “open source leeches”. He describes the debate over the perception that those who don’t contribute back in the form of code contributions are considered “open source vampires”. This perspective only makes sense if you assume that roles are clearly delineated as developer and user. In this model, developers shoulder all the work and manage the projects. They contribute source code, debug problems, debate the merits of new features, and add them as needed. Developers are the key players who chose the direction of a particular project and are the primary actors responsible for its success or failure. Open source projects are by developers, for developers.

Following this model, passive participants merely use the software. The developer community regards users as people who only take what was freely available and make no real contributions back to the project or community. Non-developers are often spoken of in disdain as problematic and opportunistic. Passive participants are thought to have nothing to offer open source projects. They are just freeloaders benefiting from the open licensing terms.

Where does this perceived divide come from? It may be the social barriers that grew in developer communities that made it such that only people who could write code, and who fully understood the internals of the open source project in question, could participate in development discussions. There is still frequent debate about open source elitism that is thought to separate the classes of participants. In this divide, developers rebuke users for simply taking the work of others and giving nothing in return and the users rebuke the developers for not understanding the mainstream’s wants and needs and for keeping development restricted to a small circle of people.

This divisive model misses the complexity of open source ecosystems. While some of its points may have validity, value generation in the ecosystem is not controlled purely by these factors. Passive participants are essential to value generation.

Users Provide Value

The emergence of the participatory Web has changed the nature of engagement in open source projects and is in the process of changing the definition of the roles different participants play. At the same time, open source projects are continually building upon one another, and combining in new and innovative ways to address business needs. Ecosystems have formed around some of the larger open source projects, and users make a significant contribution to the overall health and success of the projects.

In 1998, Netscape paved the way as the first widespread commercial open source success. It redefined the open source game, showing that companies could participate in, and even lead, open source projects and be successful. Netscape turned the traditional software business model on its head. It was in this breeding ground of new potential that the traditional model of participation in open source projects began to erode.

Prior to the open sourcing of its code, Netscape had been giving away its browser for free. The management team quickly realised that in order to compete with Microsoft’s Internet Explorer browser, Netscape needed to put its browser in the hands of every single potential Internet user, and that the best way to do this was to give it away for free. The large number of users, in turn, would help fuel sales of Netscape’s server products to companies who wanted to build an Internet presence and conduct e-commerce. The non-paying users of Netscape’s browser played an integral role in the company’s strategy.

When Netscape released its browser code as open source, many users fell into the traditional open source roles of developers and non-contributing users. But, new user roles began to emerge. The advocate user came into being. These users do not contribute directly to a program’s source code or development. But, after using the program, they spread the word by recommending it to their friends and colleagues. In this manner, they increase awareness of the product and bring in more users who may, in turn, make contributions in code or in another ways.

Advocates are just one class of user that has begun to emerge as an important player in open source projects. They add value to the project not through code contributions or feature testing and implementation, but by spreading the word about the project and adding value to the brand by increasing its awareness. In the case of Netscape, its brand was its most valuable asset. The strength of its brand led directly to its acquisition by AOL in the spring of 1999, in a deal worth over $4 billion dollars.

The popularity of a brand can be directly influenced by the number of people who use the brand’s product. By allowing users to use and freely distribute the product, they become distributed marketing and promotional agents for the company. Companies should encourage and nurture user participation to improve their branding strategy and the reach of their market. Users are particularly useful for viral marketing through word of mouth referrals. This form of marketing greatly hastens the adoption of new products.

More than ten years later, observers of open source participation still see average users as unable to help themselves, let alone contribute anything meaningful. It is assumed that all users of open source software must have a profile that is comparable to a developer’s in order to do anything other than “passively consume”.

Emerging User Roles

The participatory Web has put the Internet into the hands of the user. It enables anyone to readily generate and post content in a broad array of contexts. It has helped thousands of communities to grow and thrive around interactive products and services. For open source projects, it has also created a new class of user: the non-code-contributing user.

Originally, the only contributions a participant in an open source project could make were in the form of code. They could debug a problem or implement a new feature and submit the revised source code to be included in the project’s next release. The technical barrier to entry effectively prevented non-programmers from participation. In recent years, non-programmers can add value to open source projects without ever writing a line of code.

Aside from the value that users generate with word of mouth and other promotion of open source products, projects benefit from the complementary works that non-code-contributing users create. In the Netscape context, this might come in the form of web pages. Every user who creates a web page and puts it on the Internet for other people to access is indirectly adding value to the Netscape browser by increasing the number of pages the product can be used to access. If there were only 10 web pages in the world, the Netscape browser would not be very useful. As the number of web pages grows into more content that any given person might want to access, that growth adds value to the tool they will use to access that content.

A more direct example can be seen with the virtual world Second Life. Users purchase land and build on it in a 3D environment. This building is more akin to graphic design or visual arts than it is to programming. Users create objects and share them with other users. They then use the space and their creations to offer services and games, run businesses, trade currency, and generally create all kinds of complementary products and services that make the experience of using Second Life’s virtual world more appealing. Second Life released the code of their viewer as open source. This move promoted the development of hundreds of diverse third party applications and interfaces such as 3D headsets, terminals for the blind and Skype plug-ins. It has spurred the development of complementary assets that add value to their core product and brand. The parent company, Linden Lab, continues to generate significant revenue from network services provided within Second Life, and has attracted tens of thousands of new users through its open source efforts.

Users have played a central role in the Second Life ecosystem. Without the critical mass of users creating interesting spaces and using the project, all of the development work and code contributions that went into the product would go unused. These participants played a role in the coming into existence of all the derivative and complementary products that have and will emerge from the ecosystem. Without the passive participants, these products would have never existed, and the value capture for the companies that created them would not have occurred.

Suggestions for Companies

Since its founding in 1998, the Open Source Initiative has encouraged the software industry to re-evaluate intellectual property strategy. Many companies have been in a similar position to that of Netscape in 1998. They have an existing product, a growing user base with different motivations and skills, and revenue generation mechanisms. By taking a fresh look at the different classes of people who participate in the ecosystem they have built around their product, and broadening the operational definitions used to classify them, they are now in a position to be able to begin to quantify the value of passive users. The industry is full of data that is suitable to case studies of such situations.

Managers of companies considering open source strategies can begin planning and analyzing how to structure their open source projects to get the optimal benefit of all the different classes of users. By better understanding the different user motivations, and how different users add value to their core offering, they can increase their likelihood of success and strengthen their brand. Open source users contribute through code development, marketing and promotion, and complementary product creation. They also act as idea generation factories to help the company innovate better and build products and services that better meet the needs of their customers.

The biggest challenge in leveraging this untapped resource is changing the mentality of developers in the open source communities who have long enjoyed the center stage. Technology author Chris Pirillo describes the issue succinctly: “What would the world of software be like if the inmates were running the asylum? I’d argue a lot more useful, and a lot more beautiful. But users are usually in the back seat when it comes to the evolution of a utility – from beginning to end. Let me put it to you this way: software is useless if there isn’t anybody using it. The world of software is getting larger by the day, and more people are finding new and different ways to improve lives with digital code. Programmers suffer from a miscalculation of a user’s wants, needs, and desires. As a power user, I expect better, I expect faster, I expect smarter, I expect more. When I see a new piece of software that holds promise, I call out its shortcomings in the hopes it will be closer to perfection with the next revision.”

It is this culture gap that must be overcome to get the most out of the user base of an open source project. Dedicated community managers are one option as they can help focus the energy of the community towards achieving shared goals. They can also help increase inter-group communication, and help the community grow.

Further, the distinction between passive and active participants may be blurry. It is unclear how to best separate classes of participants, as their roles might be circumstance based. Is a code contributor both a developer and a user? Does it matter how much code they contribute? Further research into understanding roles would help quantify the dimensions of contribution.

Traditional consumer marketing metrics can also be used to learn about one’s user base. By better understanding the users, companies can create more useful products that better meet user needs. Different types of users behave differently, and it may be possible to encourage them to participate in ways that relate to their interests. For example, innovative users tend to adopt technology more readily, don’t mind bugs and crashes as much, and are willing to put in the time to help report errors and suggest improvements. Users who are highly involved with the product are more likely to be able to identify novel uses for the product as they have integrated it more in their life. Loyal users may not be technically savvy, but will gladly wave the banner of the company, promoting the product far and wide and bringing in new users. There are many other passive participants such as event promoters, designers of complementary products, documentation creators, and financial donors.

By carefully partitioning the participants of an open source community using standardized measures, a keystone company could assign its community management and marketing resources more effectively. It could better leverage the inherent value in the user community, and potentially improve the value creation in the ecosystem.

The Challenge of Assessing Value of Passive Participation

Passive participants add value to an open source ecosystem. The challenge is in assessing that value. What is the dollar amount, on average, that each participant adds to the ecosystem? How does that amount vary based on the type of participation? Is it easier to extract value from an open source ecosystem that has more passive participants? The answer to these and many other related questions is of great interest to companies as it defines their positioning strategy and community management practices. If it were possible to better quantify the value of passive contributions, the model of value creation in open source ecosystems would be strengthened, and would improve the ability of keystone companies to strategically position themselves in the ecosystem.

Summary

Companies that make the mistake of discounting the passive participants in their open source community miss out on a valuable resource. It is time to reshape the classical definitions of roles in open source ecosystems. Passive participants should not be viewed as leeches. They contribute to the ecosystem in many ways other than code. As our understanding of how open source ecosystems work improves, the next challenge is to better quantify the value of passive contributions. By better understanding the value of every eyeball in the open source ecosystem, keystone companies can make better strategic positioning decisions, and create more value in the ecosystem.

posted by Mekki at 12:33 pm  

Tuesday, November 13, 2012

Mekki’s Famous Pancakes – By Request

I had a request for the recipe for Mekki’s Famous Pancakes (TM), so here you go:

  • 1 1/2 cup of flour (regular is fine, but I like whole wheat flour)
  • 1/2 cup of instant oats (optional)
  • 2 tablespoons baking powder
  • 1 tablespoon of brown sugar (regular sugar is fine too)
  • 2 eggs, beaten well
  • 1/2 teaspoon salt
  • 1 1/2 to 2 cups of milk (depending how liquid you want; start with a little and add more until you have enough that it pours well when blended)
  • 3 tablespoons of melted butter or margarine (or light oil like canola)
  • Lots of cinnamon (optional)
  • Little bit of cardamom (optional)
  • Little bit of nutmeg (optional)

Mix it all together (blender is nice, but hand mixer in a bowl works fine too), but don’t overmix.  Pour into a preheated, greased pan.  Cook until the top has bubbles that are starting to pop and the whole pancake is solid enough to flip without falling apart.  Flip and cook other side for one third the amount of time as the first side.  Serve hot with syrup (maple or corn syrup are best!) and butter; works with nutella too!
ENJOY!

posted by Mekki at 9:42 pm  
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