Open Innovation Strategy: Open platform-based digital mapping; as tools for value creation and value capture - case study of OpenStreetMap and Google maps JEFFRY LEONARDO WILLIAM MOCHAMAD RIFKY WIJAYA KTH Industrial Engineering and Management Master of Science Thesis Stockholm, Sweden 2017 KTH Industrial Engineering and Management Open Innovation Strategy: Open platform-based digital mapping; as tools for value creation and value capture - case study of OpenStreetMap and Google maps JEFFRY LEONARDO WILLIAM MOCHAMAD RIFKY WIJAYA Master of Science Thesis INDEK 2017:72 KTH Industrial Engineering and Management Industrial Management SE-100 44 STOCKHOLM Master of Science Thesis INDEK 2017:72 Open Innovation Strategy: Open platform-based digital mapping; as tools for value creation and value capture - case study of OpenStreetMap and Google maps Jeffry Leonardo William KTH Industrial Engineering Mochamad Rifky Wijaya and Management Approved Examiner Supervisor 2017-09-30 Terrence Brown Serdar Temiz Commissioner Contact person n.a n.a Abstract Open innovation has been rising in popularity as an alternative to traditional model for organizations to enhance innovation in their products or services. In the past, the innovation processes was time-consuming and costly. It has now become significantly efficient and effective, supported by the advancement of today’s IT such as Internet, Cloud Computing and Big Data. Open innovation has changed the aspect of the innovation source; from closed internal R&D to fully utilization of consumers’ collaboration. Decision to shift towards open innovation strategy has been lying on several areas including motivation, financial direction, and preference of the innovation strategies and business models that fitting the organizational core strategy. This research studied the relation of these areas and its effect; it determined the way IT-organization creates and captures value that were done by opening its product platform. This thesis was conducted to analyze the open innovation approach in an open digital navigation platform, featuring two platforms as case study: Google Maps and OpenStreetMap. The investigation emphasized the utilizing of the open innovation strategy to build its platform where crowdsourcing and open source software as objects highlighted in the research. The data was collected from secondary sources. Research findings suggested that crowdsourcing and open source software strategy are the main strategies of open innovation implemented in IT digital mapping platform to create and capture value. While these strategies have been practiced in both platforms, circumstances (motivation, financial direction, and business strategy) that hovering around the internal aspect of organizations affected the application of those strategies. The implementation results are differ according to preferred business model. The result of this research suggested that a non-profit based organization tends to utilize open innovation to improve the value of their product through consumer collaboration, while a profit based organization adopts open innovation to generate additional pool of revenue through customers’ feedback and input data. The open innovation leads to creation of a new business model as the foundation of innovation. Keyword Open innovation; open platform; crowdsourcing; open source software; collaboration; Google maps, OpenStreetMap; Business model. i Acknowledgement We hereby would like to express our deepest gratitude towards everyone who helped us in the completion of our thesis. First of all, we would like to express our sincere appreciation to our supervisor Serdar Temiz for his unwavering support with constructive motivation and constant mentorship throughout this project. We would like to extend our big appreciation to our programme director, Dr. Terrence Brown for all of his comments and guidances that have been very valuable for us to complete the programme. In addition we would like to thank Gregg Vanourek for his comment, suggestions, and feedback given during the presentation of this thesis. Without their guidance and persistent help, this thesis completion would not have been possible. We are truly grateful for the Swedish Institute for the contribution and support so that we could have the opportunity to study at the prestigious KTH Royal Institute of Technology. Furthermore, we would like to express our gratitude to our peer-review partners Morteza and Christopher Wood for giving us constructive feedbacks to our thesis. Last but not the least we would like to thank all our family and colleagues for their unconditional support. ii Table of Contents Abstract i Acknowledgement ii Table of Contents iii List of Terms and Abbreviations iv List of Figures v List of Tables v INTRODUCTION 1 1.1 Background 1 1.2 Research Problem 2 1.3 Research objective and question 2 1.4 Delimitations 2 LITERATURE REVIEW 4 2.1 The Origin of Open Innovation 4 2.2 The Open Innovation Classification; the direction of innovation 6 2.3 Financial direction 7 2.4 Open innovation model: Product Platforming and Networking 8 2.4.1 Product platform 9 2.4.2 Business Model 10 RESEARCH METHODOLOGY 12 3.1 Research Method 12 3.2 Data Collection Method 13 3.2.1 Secondary data 13 3.2.2 Case selection 13 3.2.3 Data Analysis 14 3.2.4 Validity 14 3.3 Ethical and sustainability consideration 14 CASE STUDIES 16 4.1 Case 1: OpenStreetMap (OSM) 16 4.2 Case 2: Google Maps 21 DISCUSSIONS AND CONCLUSIONS 28 5.1 Discussions 28 5.1.1 The purpose of utilizing opening platform is to encourage innovation acceleration in IT digital technology industry 28 5.1.2 IT digital mapping firms harnessing knowledge from multi directional source for value creation process 28 5.1.3 The difference of strategy of open innovation depends on the financial nature of the firms 29 5.1.4 The emphasize of open source software strategy either for value creation or value capture is based on the firm’s business model 30 5.2 Summary of discussions 31 5.3 Conclusions 31 5.4 Limitations 33 5.5 Recommendations for future research 33 References 35 iii List of Terms and Abbreviations API Application Programming Interface GDP Gross Domestic Product ICT Information and Communication Technology IoT Internet of Things OI Open Innovation OSM OpenStreetMap OSS Open Source Software R&D Research and Development SDK Software Development Kit iv List of Figures Figure 1. The Open innovation Paradigm (Mortata et al. 2009) 5 Figure 2. Classification of open innovation models (grassmann and Enkel, 2004) 8 Figure 3. OpenStreetMap user statistic. Source: OpenStreetMap user statistic report (July 19, 2017). 16 List of Tables Table 1. The differences between closed and open innovation principles 6 Table 2. Aspect of openness of a platform (Thomas et al., 2008) 9 Table 3. OpenStreetMap's timeline 18 Table 4. Partnership with external resources (source from openstreetmap.org, 2017) 20 Table 5. Detail of membership plan of OSMF 21 Table 6. Differences between Google maps APIs standard and premium plan features 25 Table 7. Pricing detail for Google maps Android deployment 26 Table 8. Pricing detail for Google maps iOS deployment 26 Table 9. Pricing detail for Google maps Web deployment 26 Table 10. Pricing detail for Google maps Web service deployment 27 Table 11. Differenciation of create and capture value process between a profit and non-profit based Open platform 31 v CHAPTER ONE INTRODUCTION 1.1 Background In the fierce competition over the market nowadays, organizations are required to stay innovative in order to stay relevant amidst high competition in the market. Innovation itself is a time, resources and cost- consuming activity required to create, capture and deliver value to customer. In the last decade, research studies revealed the phenomenon when more and more companies has shifted their paradigm on obtaining and commercializing industrial knowledge which given birth to open innovation paradigm (Chesbrough, 2003a). The open innovation arises as the alternative to traditional model of managing innovation where companies realize that internal R&D department become less effective in terms of more time and resources needed to generate valuable ideas that can successfully enter the market (Chesbrough and Crowther, 2006). Open innovation has increased in popularity both in theory and practice due to benefits it offers shorter product life-cycle, the abundance of external resource that bypass internal limitations, and shortage of costs. Nowadays, the act of opening up the innovation process has become increasingly popular especially in the tech industry (Gassmann et al., 2010) which progressively transform from completely close to fully open (Chesbrough, 2003b). In the area of IT software industry, the act of developing software in the window of collaborative public is known by the term “open source software”. The open innovation and open source software has rigid dichotomy in the eyes of academic literature. Open source software concept was born long before Chesbrough introduced open innovation in 2003. It was initially labelled as “free software” in 1983 by Richard Stallman, a researcher at MIT as the reaction to the uprising software vendors emerging in the ‘70s. It is claimed to offer superior benefits compared to traditional proprietary software model such as lower cost, security, no vendor “lock in”, and better quality according to survey provided by Open Source Business Conference (Rothwell, 2008). Although open innovation and open source software stand independently in theory in the sense that both concepts were brought into conception in different era, there are many studies conducted around the domain between these two concepts which advocates their similarities in term of collaboration and sharing as the key principle. In his research, Letellier advocates that open source or free software is a way to innovate in software industry and it is an exemplary and very effective platform of open innovation, along with open source projects or communities that act as innovation intermediaries (Letellier, 2008). The benefit offered in adopting open source software strategy in terms of efficiency, interoperability and innovation has attracted major IT firms to consider adopting OSS in their environment (Vaughan, 2016). Open source software projects has been thrive in recent years with cloud, big data, content management, databases, operating systems, development tool, mobile technologies becoming several major tech areas where OSS is being successfully adopted. This phenomena has undoubtedly driving IT tech firms to moving towards OSS in their IT environment or to running their business. According to research conducted by BlackDuck Software, it has reported that there are over 180,000 open source projects running since 2016 in the IT technology realm nowadays which shows massive interest in OSS (Vaughan, 2016). In the US where the pioneer of forefront technology adopter reside, 65% of the US-based companies are contributing to OSS project and almost all top software giants such as Google, Microsoft, Apache and many more are moving towards OSS (Vaughan, 2016). Since open source software continues to be a critical part in modern areas of IT, there has been shifting in its key of openness in OSS, from traditional source code into API (Application Programming Interface) as the point of interface and integration leveraging efficient use of cloud computing and service-based infrastructure (Lyman, 2012). During the course of innovation, APIs has transformed drastically from a term understood only by software professionals into strategic tool that can contribute to organizational profitability. This phenomenon is called API economy (Columbus, 2017). 1 The circumstances behind the initiative to embrace open source software are diverse depends on the purpose of the firms. The decision could be driven by commercial intention (Fletcher, 2015) or idealism to the OSS principle for the purpose of value creation only. There are organizations that enticing the benefit of open source software strategy to seek contribution from outside to propel innovation process, while others use it to reach new market segment that they never reach before. 1.2 Research Problem In prior research regarding open innovation industrial practice, it has been argued that “while open source shares the focus on value creation throughout an industry value chain, its proponents usually deny or downplay the importance of value capture” (Chesbrough, 2005: 3). Prior research regarding open innovation has been focused heavily in the study of value creation process while the mechanisms of organization to generate profit (value capture) are traditionally discussed in the different context which is business model. Instead of looking from the value creation standpoint, this research will tackle the research gap relates to the firm’s circumstances in embracing open innovation approach and its relation to the preference of strategies to accumulate innovation and creation of new business model. Additionally, this research will complementing previous research by providing case of open innovation practice in modern IT software industry practice instead of that in prior research which discussed open innovation practice in traditional big tech firms. In this research, two IT digital mapping platforms, Google Maps and OpenStreetMap has been chosen for the case studies representing commercial and noncommercial purpose respectively. Both platforms has gaining success in advancing its technology proven by millions of subscribers of the services by utilizing open innovation since their early development. Furthermore, each platform has enormous base of open source community. 1.3 Research objective and question This research aims to help highlight knowledge into the circumstances that motivate IT digital tech organization to embrace open innovation strategy to their platform and how by adopting these strategies can influence the way the organizations create and capture value, given that collaborative effort is essential to sustain the platform development. Emphasize will be put in open source software and crowdsourcing strategy to see how firms can capture value from sharing their APIs to the community. The advancement in IT leverage the creation of new value proposition based on open innovation. Firms such as eBay and Expedia has generated nearly 60% and 90% portion of their revenue respectively from the APIs business with developers as their customers (Murphy et al., 2016). Based on the above statements, this study will investigate the following research questions: • What is the circumstances (motivation and financial direction) that driving firm to open its platform and implement open innovation? • What types of open innovation strategy used in IT tech firm to create value? • How firm capture value from open innovation strategy, given that open innovation business model involving external collaboration as part of value creation? 1.4 Delimitations Delimitations refer to self-defined characteristics that limit the scope and boundary of the research study. The delimiting factors could be the research questions, theoretical aspect the researcher adopts, circumstances of time, or population researchers choose to investigate (Simon, 2011). 2 This research emphasizes open innovation approach in an open digital navigation platform; featuring Google Maps and OpenStreetMap utilizing the open innovation strategy to build its platform where crowdsourcing and open source software as objects highlighted in the research. Due to time constraints, our research was limited to the open platform from provider’s perspective. The research does not discuss the platform’s third-party perspective which includes the external developers that use APIs and SDKs to develop their own apps. Furthermore, the researchers only collect secondary data. Thus, primary data collection would be needed for further studies. This thesis mainly discusses the circumstances behind the firm’s decision to embrace open innovation and its relation to how they can create and capture value from external collaboration without indicating organizational and management perspective. Another limitation to this study is the absence of cost figures to implement open innovation in the open platform provider. The cost structure is important considering it is related to the open platform provider’s business and financial health. The cost structure limitation was due to no clear data and information released for public. 3