Tuesday, May 30, 2006

A new perspective on Build vs. Buy

I came across what I thought were conflicting perspectives about the old build vs. buy debate while reviewing “Open Innovation” by Henry Chesbrough and “The Innovator's Solution” by Clayton Christensen. I think I came up with a resolution to the apparent conflict and thought I would share it.

The conflict concerns whether or not to leverage external innovations. At the Fuzzy Front End of innovation, “Open Innovation” says leverage the external innovation whereas “The Innovator’s Solution” says do-it-yourself.

In “The Innovator’s Solution” we learn how companies should consider whether or not to buy external technology. As the logic goes, it depends on the stage of development. In the early days of a new type of product (including the Fuzzy Front End), innovators need a lot of control over the underlying technology to make sure the product works very well for the customer’s main pain point. This control is called an interdependent architecture. As a product category improves though, most customers feel their main pain point alleviated by the category and their primary buying decisions shift toward convenience and integration to other products. Once this shift occurs, modular architecture becomes more important than interdependent architecture. With modular architecture, winning innovators focus on making their product a flexible platform that can plug and play components from external providers.

A contrasting view comes from reading “Open Innovation”. “Open Innovation” teaches that companies have begun selling their unused innovations. The new availability of venture capital means people with great ideas working in big companies have a new way to develop their idea than to wait for their employer to support it. As a way to stop the loss of ideas, big companies now try to sell those ideas before the talent can escape. The fear of a competitor harnessing this stock of inventions gives buying companies a strong motivation to gain first access. Therefore companies are setting up Technology Scouting and Technology Marketing groups to buy and sell innovations.

From my initial read, it seemed “The Innovator’s Solution” suggested innovators build everything themselves whereas “Open Innovation” taught the opposite. How could we mere practitioners get the best of both worlds? Here are my thoughts on that question.

“The Innovator’s Solution” argues for innovators to have control. “Open Innovation” does not really talk about control, it talks about sourcing from the outside. The best of both worlds is to have control of an external source. That gives the innovator the interdependent architecture from “The Innovator’s Solution” and the opportunity not to reinvent the wheel from “Open Innovation”. Cast another way, this is about openly innovating for an interdependent architecture.

To innovate openly an interdependent architecture at the Fuzzy Front End of innovation, you could start by looking externally for companies spinning off IP or startups developing what you need. If you find them, acquire the IP. Don’t enter into a supply relationship with the source though because then you won’t get the control you need for an interdependent architecture.

If you don’t find an acquisition target, you don’t have to give up because there are other sources to turn to. Another would be experts from other industries. Another source could be a raw research finding waiting to be harnessed for commercial use. Another strategy is to decompose your sourcing problem into components that you could search for, again as wholesale acquisitions, experts, or research findings. All of these are Open Innovation too.

From my analysis of “Open Innovation” and “The Innovator’s Solution” I’ve learned why it makes sense to source external technology at the Fuzzy Front End of Innovation and a rational way to do so. The main benefit is not re-inventing the wheel while also preventing your competitor from accessing available technology. The rational way to handle it is to acquire the technology so your development staff has maximum control to be able to meet early customers’ need.

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