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Products, Platforms, and Open Innovation: Three Essays on Technology Innovation

Abstract

High technology industries, where IT artifacts are core to the business model of a firm, are marked by a high level of market competition and uncertainty. Firms within these industries are constantly evolving at a swift pace. Products and services developed in these industries have the shortest life cycle from product development to maturity, compared to those developed in other industries. According to a 2015 KPMG report, products and services in the high technology industry have an average maturity life cycle of 0.5 - 5 years, which is the shortest among all sectors (KPMG, 2015). Value generation and capture from these products and services must happen in a shorter duration compared to those from other industries. Imitation of products and services in these industries is also rampant, diminishing opportunities to generate value from innovative products and services. According to extant research, imitation among vendors in the IT sector is widespread, and firms mimic direct competitors in the introduction and withdrawal of products and services (Ruckman et al., 2015; Rhee et al., 2006). While the inherent nature of products developed in the IT industry and the associated incremental innovation leads to better performance gains, these gains erode quickly via imitation from firms competing in the same domain (Ethiraj et al., 2008). For many firms, these issues lead to a shift in their revenue generation model. Rather than appropriating the value from direct sales of products and services, firms have slowly started opting for innovation strategies that allow rent-seeking through opening up the business and revenue models of the firm. These strategies may include but are not limited to, adopting open standards for their products and services, establishing platform business models and engaging in open innovation. In this thesis, I assess these three innovation strategies and their value to a firm in terms of product and services and related value performance. In the first essay of this thesis, I start by examining the lifecycle of products in information technology-intensive firms, which is deemed to be shorter compared to other industries. I call these products complex assembled digital products (CADP). In the product innovation literature, the emergence of a dominant design configuration in a product category is seen as the start of a technological lifecycle that allows winners of the industry to appropriate long-term returns through incremental innovation. In the context of a complex assembled digital product, a dominant design will manifest itself as a single dominant design configuration or a narrow set of configurations that represent a majority of the products manufactured in a product category (Tushman & Murmann, 1998; Cecere et al., 2015). However, in technology-intensive firms, two challenges need further exploration. Firstly, due to the pace of innovation in technology-intensive industries, it is highly likely that a dominant design configuration never emerges (Srinivasan et al., 2006). Secondly, due to the modular nature of the products, even if a dominant design is achieved, it is achieved at the configurational level. It manifests itself as the set of components that achieves dominance in a product configuration (Murmann & Frenken, 2006). In the first essay, I examine the evolutionary attributes of the components of a CADP, which enable the components to become and remain part of the dominant design configuration of the product for a longer duration. I model the entry and survival of a component in a dominant design configuration using three evolutionary attributes: (1) pleiotropy of the component, (2) openness of the standard supporting the component, and (3) innovation source of the component. Pleiotropy as a construct is adapted from evolutionary biology and defined as the number of functionalities supported by a component. The standard supporting a component can be open or proprietary. The innovation source can be internal to the industry or external. I empirically test my hypotheses using a rich, longitudinal dataset of TV models spanning 15 years (2002-2016). The results show that components that have higher pleiotropy and that are supported by open standards not only have a higher chance of being selected into the dominant design configuration of TVs but also remain in the TV market for a longer time. However, while components developed through endogenous innovation efforts were nearly four times more likely to enter the dominant design configuration of TVs, their longevity was not significantly different from that of the components sourced exogenously. In the first essay, I look at how adopting components with specific sets of attributes allows firms to win a product market and appropriate value for a long duration from product development. In the second essay, I shift my focus from a product-based business model to a platform business model as an innovation strategy to achieve a competitive advantage. In recent years we have observed the emergence of platform businesses across domains of information technology-intensive industries (van Alystyne and Parker 2016). Firms are either completely shifting to platform business models or starting to include platform business models as part of their business strategy portfolios. Newer firms in these industries are more likely to adopt a platform business model as the core model for value generation and value capture. Seven of the ten most valuable companies in the world have opted for a platform business model as part of their overall business strategy (Cusumano et al., 2019). However, not all firms adopting the platform business model succeed in dominating the market. An exploratory study examined the success of platform businesses in terms of the number of years the firm remained in business. Taking a 20 years dataset of the firms in US markets, it was observed that only 43 out of 252 platform firms flourished are still active (Yoffie et al., 2019). Most of the surviving firms have to spend a considerable amount of resources in incentivizing the stakeholders of the platform, R&D, and marketing activities to stay relevant in the market (Cusumano, 2020). In Essay Two, I investigate the effect of a platform innovation on a firm’s performance under competitive threats. As argued earlier, technology-intensive firms operate in an ever-changing environment where competition is continuously evolving and mimicking the products of the focal firm. This constantly evolving product market competition is inherent in high technology industries. While product market competition encourages the overall pace of innovation as seen in technology-intensive industries, we are not aware of its effect on value generated by the firms operating in those industries. In the second Essay, I model the effect of product market competition on a firm’s performance. I look at how adopting a platform business model mitigates the effect of product market competition on a firm’s value generation. I use a machine learning-based firm classification method to measure the business model adopted by a firm. I extracted data from 10-K annual reports of the sample firms and classified the firms as platform or non-platform based on the supervised classification of 10-K annual reports of the firm. Using a 20-year panel of the firm’s financial data and their business classification, I explore the effect of a platform business model on a firm’s performance under high product market competition. My results suggest that adopting a platform business model can be an effective business strategy in delivering better value in general and under high market competition in particular. A third innovation strategy that has found favor with firms in recent years to build a competitive advantage over rivals is engaging in open innovation. Open innovation is defined as “a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology” (Chesbrough, 2003). In the context of information technology-intensive firms, open innovation manifests itself in many ways. In recent years, for-profit firms have started engaging with open-source communities to develop products and services on social coding platforms like GitHub. According to my investigation, 41 of the top 100 firms by market valuation have a direct presence on GitHub and actively develop their products with support from open-source developer communities. Opening up open software products and services for the world is another way that allows for faster development and propagation of products across user and developer communities (Khan, 2018). Firms also sponsor open source community developed products and regularly sponsor summer coding schools and hackathons (Mitchell, 2012). These open innovation events have shown promise in the collaborative development of products and services (Tereweisch and Xu, 2008). Firms appropriate rents by selling complementary services for the products they are developing as open-source. In his famous 1997 book, “The Cathedral and the Bazaar,” Eric Raymond coined the term “Cathedral” model of software development to represent the closed sourced, hierarchical and proprietary model of software development and “Bazaar” to represent the open-source, free and equality based software development model (Raymond, 1997). However, there is limited empirical evidence to suggest that firms create and capture value on open innovation platforms like GitHub (West et al., 2014). We do know that firms have started selective revealing of their accumulated knowledge and started engaging with open source communities (Fosfuri et al., 2008; Henkel et al., 2014; Alexy et al., 2018). In the third Essay, I investigate the effect of open-source engagement on the economic outcomes of a firm. More specifically, I look at how engagement on the open-source platform and intensity of that engagement influence the financial performance of a firm. To investigate the influence of open-source innovation on a firm’s financial performance, I created a data set containing all continuous open-source engagements of firms in high technology sectors. I collected this data from multiple sources, including GitHub, 10-K reports, and a search of innovation contests organized by firms. I then matched this data set with the financial information of the firms. I employed the generalized synthetic control method (GSynth) to estimate the model. I estimated the dynamic panel data regression model to measure the influence of open-source engagement intensity on financial performance. Additionally, I also investigated the heterogeneity in the effect of open-source engagement on the financial performance of the firm using the random causal forest. My results suggest that open-source engagement and its intensity positively influence the financial performance of a firm. The effects are heterogeneous and based on the absorptive capacity of the firm, market competition, and other environmental factors. I explore and discuss the implications of my findings on open-source engagement choices by firms. Finally, I conclude this dissertation with the findings of my essays and their implications on information technology-intensive firms. I provide additional details about my studies in the Appendices. The Appendices also highlight the additional analysis done during the research to test the robustness of the results. Overall, this dissertation has broader implications for research and practice alike. There are opportunities for future research and investigation into various innovation strategies adopted by firms in high technology industries. This research also provides directions for applying novel research methods, like the generalized synthetic control method and machine learning algorithms, in IS research

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