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, 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  

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  

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  
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