External Technology Commercialization in Diversified Firms in the Context of the Open Innovation Paradigm

Table of Content

Table of Figures, Tables and Abbreviations

1 Introduction
1.1 Problem Statement
1.2 Relevance of the Research Question
1.3 Research Approach
1.4 Outline of the Paper

2 Theory, Working Propositions and Conceptual Framework
2.1 The Open Innovation Paradigm
2.1.1 Summarizing an Approach to a Holistic Open Innovation Framework
2.2 Context of Open Innovation
2.2.1 The Diversified Firm and its Boundaries
2.2.2 Characteristics of the Extrinsic Determinants
2.3 Outside-In versus Inside-Out Innovation
2.3.1 Licensing-Out
2.3.2 Spin-Offs
2.4 Characteristics of the Intrinsic Determinants
2.4.1 R&D Independence
2.4.2 Dedicated ETC Unit
2.5 Conceptual Framework

3 Methodology
3.1 Research Design
3.2 Case Selection
3.3 Data Collection
3.4 Data Analysis

4 Analyzing the Data
4.1 Presenting the Case
4.2 Extrinsic Determinants
4.2.1 Difference among Sectors
4.2.2 Sector Size
4.2.3 Sector Industry
4.2.4 Defining the Final Propositions for Extrinsic Determinants
4.3 Intrinsic Determinants
4.3.1 R&D Independence
4.3.2 Dedicated ETC Unit
4.3.3 ETC Unit and Business Unit Alignment
4.4 Market Strategy

5 Discussion and Conclusion
5.1 Discussing the Results
5.2 Contributions to Theory and Management
5.3 Limitations and Further Research
5.4 Conclusion

References

Appendix

Table of Figures, Tables and Abbreviations

Figures

Figure 1: First part of the framework showing extrinsic determinants of ETC activities

Figure 2: Second part of the framework depicting intrinsic determinants of ETC activities

Figure 3: Third part of the framework depicting the influence on the market strategy

Figure 4: Conceptual framework of the determinants of ETC Activities

Figure 5: Three phases approach for technology transfer of the ETC unit

Figure 6: A model of extrinsic and intrinsic determinants of ETC activities

Tables

Table 1: Dahlander & Gann’s (2010) structure of openness

Table 2: Framework by Lichtenthaler & Lichtenthaler (2009)

Table 3: Selection criteria for case company

Table 4: Functions and responsibilities of the key informants

Table 5: Codes and their operational definitions

Table 6: Data extract of the ETC characteristics of the different sectors

Table 7: Additional codes and operational definitions

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

Changes in the competitive environment, globalization and the fast technological innovation rate of today have called for a shift in the corporate mindset of industrial firms. The traditional closed model of research and development (R&D) inside the firms’ boundaries, which optimally ends with a regular commercialization of the invented product, has increasingly been challenged (Chesbrough, 2003). The emerged concept of the open innovation paradigm comprises corporate activities of either acquiring external knowledge or exploiting internal knowledge besides the traditional ways of product commercialization. The latter refers to knowledge exploi- tation or more specifically to external technology commercialization (ETC) (Lichtenthaler & Ernst, 2007) and represents the core field of this study.

The increased interest in ETC across industries is a trend stemming from industrial and managerial practice rather than from theory (Lichtenthaler, 2010a). However, more and more contributions put their focus on the concept of external knowledge exploitation and its implications (e.g. Fosfuri, 2006; Gassmann & Enkel, 2004; Lichtenthaler, 2005, 2010b). Most of these studies either generally discuss the ETC particularities or specifically examine licensing strategies as means of ETC and their corporate impact. It has been argued that besides the purely financial aspects firms have different motives for engaging in knowledge exploitation activities, such as the access to another company’s technology portfolio (Rivette & Kline, 1999), the iden- tification of intellectual property infringements (Koruna, 2004) or the increase in speed of the R&D activities by realized learning effects (Lichtenthaler & Ernst, 2007). This case study concentrates on a firm’s surroundings which affect the stra- tegic ETC decision from two dimensions. First, extrinsic factors which lay beyond managerial reach, such as the industry in which the organization operates. Second, intrinsic, strategic factors like the management of R&D activities as well as the steer- ing of a dedicated ETC unit are investigated.

By scrutinizing contemporary theory on open innovation, external technology commercialization and firm characteristics, a conceptual framework will be created which will be later challenged against the findings of a case study analysis in a large diversified conglomerate.

1.1 Problem Statement

Traditionally, most industrial firms have concentrated their research and develop- ment efforts on new technologies which are later applied in their own products (Calantone & Stanko, 2007; March, 1991). This concept of closed innovation strate- gies has shifted and acquisition of external knowledge has become increasingly pop- ular in firms across industries (Cohen & Levinthal, 1990; Tsai & Wang, 2008). More recently, firms have also begun to actively promote technology commercialization efforts outside their boundaries (Gambardella, Giuri, & Luzzi, 2007). These activities refer to the notion of outbound technology transfer which implies that firms identify internal non-core technologies and match them with outside business models to ex- clusively commercialize an application in a new market (Chesbrough & Crowther, 2006).

Due to these open innovation processes the organizational boundaries become indis- tinct and the firm’s interaction with the environment increases (Cooper, 2008; Gassmann, 2006; Von Hippel & Von Krogh, 2006). This leads to a strong involve- ment of multiple internal and external sources and different inside- and outside- focused commercialization channels (Christensen, Olesen, & Kjær, 2005; Lettl, Herstatt, & Gemuenden, 2006; West & Gallagher, 2006). Consequently, these cha- racteristics call for a structural modification of the organization to advocate the iden- tification of either external or internal open innovation opportunities. Whereas the field of research concerning outside-in impediments and firm specific antecedents is broad (Benson & Ziedonis, 2008), research on external technology commercializa- tion is comparably scarce and mainly focused on descriptive issues with only some studies addressing environmental antecedents of inside-out processes (Nagaoka & Kwon, 2006). However, empirical analyses of internal antecedents are lacking, too (Lichtenthaler, 2010b).

Lately, more and more firms follow open technology exploitation strategies and some pioneering companies, such as Xerox, Texas Instruments and Honeywell Inc., generate considerable financial and strategic value from transferring knowledge to new markets, for example through spin-offs or licensing (Chesbrough & Rosenbloom, 2002; Fosfuri, 2006; Rivette & Kline, 1999). Technology exploitation is a multi-level process including the monitoring of internal R&D activities, the iden- tification of potential innovations, the recognition of an attractive and interesting market and finally the commercialization process itself (Lichtenthaler & Lichtenthaler, 2009). This process requires managerial endeavor to align the business unit’s goals with the corporate strategy which is especially crucial in diversified firms, since business units may have deviant competitive interests, limiting the out- ward transfer of technologies in the long-run (Porter, 1987; Ramanujam & Varadarajan, 1989). In his early work Burgelman (1983) argues that a firm must achieve a competitive advantage as a whole to profit from outward technology trans- fer. Thus, the management has to concentrate on the keep-or-sell decision (Lichtenthaler & Ernst, 2009) not only from a business unit but also from a corporate performance and strategic perspective. To optimize external commercialization, firms have to adeptly control the organizational interfaces between the management and the business unit level. This is especially important, since research departments may reject to conduct activities which are not valuable in the short run (Parr, 1996). In line with these arguments, Escher (2003) recommends that special attention should be devoted to a clear division between corporate and divisional duties.

Hence, the question arises how firms get access to such organizational and strategic levers to steer external technology exploitation. This question leads to the problem statement of this study:

How and why do diversified technology firms engage in specific external technology commercialization activities?

1.2 Relevance of the Research Question

Whereas research on external technology exploration (i.e. the acquisition of external knowledge) in the context of open innovation is relatively broad, earlier research in the field of external technology commercialization is still relatively limited. Many prior works mainly focused on technology licensing and are rather theoretical with- out addressing managerial challenges (Christensen, et al., 2005; Gassmann & Enkel, 2004; Lichtenthaler, 2005). Other studies put their focus on an aggregate industry level but do not provide managerial implications in the specific field of technology transfer (Arora, Fosfuri, & Gambardella, 2001). According to Lichtenthaler and Ernst (2007), an increase in outbound open innovation (i.e. external technology commercialization) could be observed. However, this trend stems from practice ra- ther than from theoretical considerations and has been relatively neglected by aca- demic research. Moreover, external technology commercialization or knowledge exploitation represents a small niche in the academic world of open innovation re- search, dominated by a fistful of contributions (e.g. Gassmann & Enkel, 2004; Lichtenthaler, 2005, 2010a, 2010b; Lichtenthaler & Ernst, 2007). Furthermore, these studies mainly focused on licensing as the main means of ETC by relatively neglect- ing other strategic commercialization instruments such as corporate spin-offs and equity carve-outs. Hence, this study aims at filling a research gap by including a gen- eral view of ETC activities, an investigation of their extrinsic and intrinsic determi- nants as well as an analysis of the integration of ETC activities into the corporate organizational structure.

1.3 Research Approach

The purpose of this case study is to investigate external technology commercializa- tion processes and their determinants in laterally diversified firms. In order to facili- tate the accomplishment of this goal, an appropriate research approach has to be found and designed. As a starting point, the author has to decide whether to conduct a quantitative or qualitative research. This question is crucial, since “the research design constitutes the blueprint for the collection, measurement, and analysis of data” (Deming, 1990, p.26). Quantitative research primarily aims at answering ‘what- questions’ whereas the focus of qualitative research is the investigation of ‘how- and why-questions’ (Blumberg, Cooper, & Schindler, 2005). Since the study at hand aims at shaping an understanding of the extrinsic and intrinsic motives and determi- nants of external technology exploitation in diversified firms (why-question) and the associated processes (how-question), a qualitative research design should be more suitable than a quantitative approach.

The previous paragraph outlined the relevance of the research question and discussed the existing research gap which makes it necessary to extend the theory of external technology commercialization, especially in the context of the open innovation para- digm. If there is an existing lack of knowledge about a phenomenon or about rela- tionships, a qualitative research is appropriate (Eisenhardt, 1991; Miles & Huberman, 1994).

After the decision in favor for a qualitative approach, the researcher has a variety of techniques and processes at hand such as case studies, grounded theory, interview inquiries, etc. For this study the author considers the single case study approach as the most suitable instrument to serve the purpose of the study, since it provides the opportunity to analyze the environment and internal processes of a firm in a detailed and holistic way. As a first step an extensive literature review in the fields of open innovation and external technology commercialization supports the development of constructs and the derivation of a conceptual framework in order to answer the re- search question. A conceptual framework depicts key factors and constructs of a study and visualizes the presumed relationships among these variables (Miles & Huberman, 1994). The developed model serves as the theoretical groundwork for this study. In a single case study at a suitable firm the conceptual framework and the re- lated working propositions will be validated, shaped and if necessary extended or rejected.

1.4 Outline of the Paper

The study is structured as follows: The introduction chapter (Chapter 1) outlined the topic and the context of the research by presenting the research problem and its re- levance. In Chapter 2 the relevant theory of the open innovation paradigm, external technology commercialization and firm specific characteristics are presented to ela- borate the working propositions and to develop a preliminary framework. This chap- ter also serves as a literature review to support the theoretical background of the the- sis. Chapter 3 provides a detailed introduction to the research methodology and anal- ysis, explaining why the particular research method has been chosen and how the data has been retrieved. In chapter 4 the results are discussed and the propositions will be challenged with referring to the findings. Finally, Chapter 5 discusses the findings, the final framework and the theoretical contribution of the study. The study will be concluded by recommendations for further research and a final conclusion.

2 Theory, Working Propositions and Conceptual Framework

The following chapter introduces prevailing literature on open innovation, diversifi- cation and external technology commercialization. It serves as literature review to support the conceptualization of a preliminary framework. In order to approach the topic, the concept of open innovation and an analysis of a firm’s associated capabili- ties are introduced. Second, the specific characteristics of laterally diversified firms are analyzed to depict the linkage to the concept of inside-out open innovation. Third, two instruments of external technology commercialization are compared and the managerial challenges in this particular setting are discussed. Finally, the chapter closes with the introduction and explanation of the developed preliminary conceptual framework.

2.1 The Open Innovation Paradigm

The traditional model of technology research and development has exclusively fo- cused on the firm’s own products (Ahlstrom, 2010; Wyld, 2010; Wyld & Maurin, 2009). Thus, the innovation process and the related corporate strategies were consi- dered as relatively “closed” (Lichtenthaler, 2011b). Since innovations are seen as the main driver to sustain a competitive advantage, companies are constantly seeking for instruments and strategic levers to enhance their innovativeness (Besanko, Dranove, Shanley, & Schaefer, 2009). However, recent contributions see a downturn in the effectiveness of the conventional closed innovation approach and a trend towards a more open concept of innovation activities (Chesbrough, 2003a; Gassmann, Enkel, & Chesbrough, 2010). After Henry Chesbrough’s publications on the open innovation paradigm (Chesbrough, 2003a; 2003b; 2006) it became obvious that only the labe- ling of this concept was new but the mechanisms root far back in industrial history (Gann, 2004). Over many decades, companies have been implementing activities such as the use of external input to improve the internal technology development or the search for outside commercialization of non-core technologies. A recently con- ducted literature review by Dahlander and Gann (2010) highlighted already existing linkages of the open innovation concept to contributions about absorptive capacity (Cohen & Levinthal, 1990), the exploitation vs. exploration discussion (March, 1991) and Teece’s (1986) concept of complementary assets. It has even been sug- gested that closed innovation has never been a constant framework, instead open innovation practices were historically more dominant (Mowery, 2009). This twofold perspective was clearly summarized by Trott and Hartmann (2009), who found that there exists a continuum of varying innovation approaches focusing on either very closed or on open innovation activities. Chesbrough captured this fact with asserting 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” (Che- sbrough, 2003a, p.26).

The recent development in a firm’s R&D environment like the dearth of resources, shorter product and innovation cycles and escalating development costs is seen as one of the main reasons why firms are constantly searching for new innovation strat- egies (Gassmann & Enkel, 2004). This trend is amplified by the increasing wide- spread of technologies, innovations and research. Although there is a growing num- ber of firms engaging in open innovation activities, the concept has not yet been ex- plicitly clear cut (Huizingh, 2010). The concept has been enriched by its different forms and tastes but they also hinder robust theory development, which calls for an analysis of a framework of open innovation. A first approach is the acknowledge- ment that the concept reflects a continuum of different degrees of openness rather than a dichotomy (open versus closed) (Dahlander & Gann, 2010; Huizingh, 2010). Accepting openness as a continuum allows for a better understanding of costs and benefits of openness (Foss, 2003).

The open innovation paradigm covers a variety of activities namely outbound, inbound and coupled activities, which can differ in their degree of openness (Gassmann & Enkel, 2004). Accordingly, Dahlander and Gann (2010) distinguish four dimensions of monetary versus non-monetary interactions and outbound versus inbound technology flows. These dimensions build a matrix with cells labeled as revealing, selling, sourcing and acquiring (see Table 1).

Abbildung in dieser Leseprobe nicht enthalten

Table 1: Dahlander & Gann ’ s (2010) structure of openness

2.1.1 Summarizing an Approach to a Holistic Open Innovation Framework

The above depicted framework may be a good terminus a quo for an empirical anal- ysis to enhance an understanding of the activities comprising the previously men- tioned strategies and to assess the particular effectiveness for different companies in different environmental contexts. Lichtenthaler and Lichtenthaler (2009) consider another perspective by focusing on the various flows of knowledge pertaining open innovation. In their recent contribution they distinguish between three either internal- ly or externally performed knowledge processes, namely knowledge exploration, knowledge retention and knowledge exploitation. This framework, which is depicted in Table 2, is mainly derived from findings in knowledge management and dynamic capabilities research.

Abbildung in dieser Leseprobe nicht enthalten

Table 2: Framework by Lichtenthaler & Lichtenthaler (2009)

Firms increasingly manage their knowledge processes internally and externally. In management literature, knowledge exploration has been termed as the ‘make-or-buy’ decision (Cassiman & Veugelers, 2006). The term knowledge retention in turn refers to the strategic opportunity of implementing external knowledge into the internal knowledge base or relying on inter-firm relationships. These relationships in fact represent the external knowledge base (Lichtenthaler & Lichtenthaler, 2009). On the other hand, knowledge exploitation describes the situation when firms face the ‘keep-or-sell’ problem. Since internal and external knowledge processes are com- plementary in their nature, underscoring the coordination needs from the firm-level perspective, an integrative knowledge management process is needed (Cassiman & Veugelers, 2006; Lichtenthaler & Lichtenthaler, 2009; March, 1991). Following the suggestion of Eisenhardt and Martin (2003), a successful reconfiguration and rea- lignment of the firm’s knowledge management is needed to allow for a better and sooner adaption of changing environmental conditions.

The following section will discuss the different capacity types based on the framework for open innovation by Lichtenthaler and Lichtenthaler (2009) to holistically approach the concept of external technology commercialization.

Inventive Capacity

A firm’s ability to explore knowledge in its internal boundaries, e.g. through research and development activities, refers to the term inventive capacity. Consequently, the generated knowledge has to be integrated and embedded into the firm’s knowledge base, which is possible by establishing links to already existing knowledge (Helfat, Finkelstein, & Mitchell, 2007). If inventive capacity contains the process steps from generating to integrating the knowledge into the firms existing network, this process obviously requires time and intensive monitoring and steering instruments (Khilji, Mroczkowski, & Bernstein, 2006). Although firms usually launch knowledge gen- eration as a reaction to the perception that this particular knowledge will be needed in the future (Shane, 2000), the degree of abstraction to the firm’s existing know- ledge is relatively low (Leonard-Barton, 1992). Thus, the level of inventive capacity is mainly determined by the quality and accessibility of a firm’s prior knowledge base in the respective field (Khilji et al., 2006).

Absorptive Capacity

Contrarily to the above described concept of inventive capacity, where firms inter- nally explore new knowledge, absorptive capacity refers to any strategic activity with which a firm explores external knowledge. The concept was firstly introduced by Cohen and Levinthal (1990) and defined as the “ability to recognize the value of new information, assimilate it, and apply it to commercial ends” (p.128). Again, this con- cept heavily depends on prior knowledge and the degree of the background’s diversi- ty. Since absorptive capacity is seen as cumulative, it is easier for a firm to have con- stant investments in its absorptive capacity than to invest punctually (Minbaeva, Pedersen, Björkman, Fey, & Park, 2003). Efforts in internal R&D activities increase a firm’s absorptive capacity which is seen as the main driver why firms invest in their own R&D labs and departments instead of only purchasing the results from a third party (e.g. patents or technologies) (Lane, Koka, & Pathak, 2006).

Building on the first definition, Zahra and George (2002) extended the view on ab- sorptive capacity by introducing two different elements of this concept. First, poten- tial absorptive capacity refers to the processes of knowledge acquisition on the one hand and a firm’s assimilation capability on the other hand. In order to acquire know- ledge, firms must first identify existing knowledge which is critical to the respective operations. In this context, assimilation describes a company’s ability to enhance analysis, interpretation and understanding processes by its organizational routines. In a nutshell, potential absorptive capacity increases the receptivity for the acquisition and assimilation of external knowledge (Jansen, Van Den Bosch, & Volberda, 2005).

Transformative Capacity

Garud and Nayyar (1994) argue that in order to retain knowledge over time a firm must internally develop transformative capacities. Keeping knowledge up to date and accordingly assigning resources calls for an active and dedicated management because employee (‘knowledge-bearer’) fluctuation and unused skills and routines will cause a long-term knowledge loss (Lane & Lubatkin, 1998).

As already stated above, recognizing potential fields of marketable innovations highly depends on prior knowledge. Therefore, the retention of this knowledge becomes crucial for organizations in order to sustain their competitive advantage. Consequently, Lichtenthaler and Lichtenthaler (2009) integrate this concept into their framework of open innovation capacities by defining transformative capacity as “the process stages of maintaining knowledge in a firm’s knowledge base” (Lichtenthaler & Lichtenthaler, 2009, p.1320) to subsequently reactivate this knowledge.

Connective Capacity

Theories of inter-firm relationships advance the view that interconnections between firms (e.g. alliances) can be seen as an organization’s outside knowledge retention (Gulati, 1999). In a similar vein, external networks have to be constantly managed and controlled to retain the inter-organizational knowledge pool. In this context, Kale and Singh (2007) see a firm’s connective capacity as the ability to assert alliances or any other relationship for the sake of the shared knowledge.

This concept contrasts the absorptive capacity approach, since it does not build on inward knowledge transfer. Alternatively, it describes the possibility for firms to permanently access outside knowledge without any acquisition processes (Grant & Baden Fuller, 2004).

An often cited example is Cisco with its extended portfolio of alliances (Dyer, Kale, & Singh, 2004). The company has frequently managed to access the alliance partner’s knowledge without actually transferring it. In this way, Cisco has an intensive internal and external knowledge base to its disposal.

Innovative Capacity

Peter Drucker (1985) has coined that the process of turning a subtle idea of a product or service into a marketable and practicable solution is the cornerstone of any inno- vative activity. Hence, to match an invention with its final use a firm depends on its innovative capabilities. Making sense of either internally developed or externally acquired knowledge refers to the above mentioned realized absorptive capacity which is often used synonymously in the context of innovative capacity (Zahra & George, 2002). In their model, Lichtenthaler and Lichtenthaler (2009) integrated in- novative capacity as an organization’s ability to exploit knowledge internally.

In line with Khilji et al. (2006), they argue that innovative capacity contains the operational steps of transforming knowledge from its raw state into new applications or services. In each phase prior knowledge helps to identify potential markets or a new intended purpose (Shane, 2000).

Desorptive capacity

The notion of desorptive capacity is relatively scarce in management literature. It describes the firm’s ability to externally exploit knowledge which shows analogies to internal knowledge applications (Herzog & Leker, 2010). This refers to the concept of market-related capacity which is seen as a complement to absorptive capacity. Instead of (realized) absorptive capacity, which is needed to identify suitable technologies for particular applications, desorptive capacity is crucial to find a use, market or customer for an already developed technology.

Traditional R&D activities have a technology focus but rely on the market control of the organization. In practice this means that R&D departments promote inventions which are close to the management targets for new products and applications (Gupta, Raj, & Wilemon, 1986). However, management increasingly realizes that some de- veloped non-core technologies formerly dismissed as fall-outs can be successfully brought to market, too (Herzog & Leker, 2010). Based on monetary and strategic objectives, new markets or even new applications outside a company’s main business can be identified if the organization possesses desorptive capabilities.

Desorptive capacity in this context refers to the process steps of identifying external application opportunities and matching them with internally developed technologies which are either used by other already commercialized applications or represent non- core technologies (Fosfuri, 2006). The identification of external opportunities as well as the recognition of internally developed matching technologies heavily depend on prior knowledge.

The above described summary of the required firm capacities in the context of open innovation helps to understand the associated firm specific characteristics. Under- standing the processes and required capabilities of the open innovation framework introduced by Lichtenthaler and Lichtenthaler (2009) is crucial when it comes to analyze open innovation activities inside a firm. The two different perspectives (in- ternal and external) and the three different knowledge processes (exploration, reten- tion and exploitation) create a model consisting of the essential capacities firms have to develop in order to follow different open innovation activities.Moreover, a close analysis of the framework supports the assumption that the described capacities are not mutually exclusive but complement each other in many ways.

2.2 Context of Open Innovation

As organizations are constantly influenced by their internal and external environ- ment, it is unlikely that a management concept such as the open innovation paradigm is independent from its context. The external and internal context is particularly of interest with regard to diversified firms. The following sub-paragraphs outline the specific characteristics of diversified firms in their external and internal environment.

2.2.1 The Diversified Firm and its Boundaries

In management literature diversification is mostly defined as a form of corporate strategy for a company. One of the first scholars to analyze diversification concepts was H. Igor Ansoff. According to him, “the term ‘diversification’ is usually asso- ciated with a change in the characteristics of the company's product line and/or mar- ket, in contrast to market penetration, market development, and product develop- ment, which represent other types of change in product-market structure” (Ansoff, 1957, p.113). For a company this has considerable organizational implications affect- ing the corporate orientation. Therefore, it is necessary to shortly define the concept of diversification by distinguishing its different peculiarities and by embedding them into the context of this work.

Although recent contributions have criticized diversification as an unsustainable cor- porate strategy model, arguing that firms should concentrate on their core compe- tences in order to sustain a competitive advantage, it is still a prevailing management concept. Diversified multinational enterprises (MNEs) consistently dominate the business press (Besanko, et al., 2009; Prahalad & Hamel, 2006). Diversification strategies comprise new markets and products which are internally developed and distribution or licensing activities of products, originally manufactured by another firm, as well as activities on the financial level such as acquisitions of firms or al- liances with former competitors. One distinguishes three different forms of diversifi- cation, i.e. concentric, horizontal and conglomerate diversification (Besanko et al., 2009).

Concentric diversification describes the situation when a firm adds related products, services or markets to its existing portfolio. In general, the primary goal of this step is to generate a strategic fit which in turn is expected to create synergies for the or- ganization. In this context, synergies refer to a firm’s ability to achieve a greater deal of cost savings and effectiveness by combining two or more parts of its organization (Rijamampianina, Abratt, & February, 2003). These synergies result from combining financial, management or value chain activities. Financial synergies for instance can be achieved if a unit with limited growth opportunities but a strong financial backup supports another unit with weak financial resources but a promising market potential. In operations along the value chain the combination of operating units has a positive influence on the overall efficiency as well as the amalgamation of the so called sup- porting activities such as IT or Human Resources (Eisenhardt & Galunic, 2000).

Horizontal diversification in contrast refers to the firm’s strategic decision of adding new products and services to its portfolio which are completely unrelated to its cur- rent business but may serve the same target group of customers. Although achieved economies of scope can be a cost saver in this context, synergies are not the main goal of horizontal diversification. If the firm has access to a loyal and well-funded customer base, horizontal diversification can be a fast and uncomplicated way to increase the sales volume by launching a new product or service (Sappington, 2003).

The most interesting form of diversification, especially in the context of this study, is called conglomerate or lateral diversification . It typically occurs when a firm diver- sifies into an area which is completely unrelated to its current line of business (Thomas, 2011). Abundant financial resources or the application of management routines can be sources of synergies but the primary goal of laterally diversified firms is to improve profitability. Marketing or production synergies are mostly neg- lected in this context and are of no relevance from a managerial perspective. Al- though growth is seen as the main driver for conglomerate diversification strategies, some firms emphasize the risk dispersion effect of an unrelated product and market portfolio (Amit & Livnat, 1988). Besides the competitive advantages of laterally di- versified firms, this corporate strategy entails some critical drawbacks. One of the major disadvantages is the aggravation of administrative problems associated with the increase in structural complexity. Operating in different unrelated markets may lead to a competition among business units about financial, operational or even work force resources (Thomas, 2011).

From an open innovation perspective laterally diversified firms are of particular in- terest, since these firms have to manage completely different market sectors includ- ing different R&D, marketing and product strategies. Since such conglomerates represent a construct of ‘many firms’ operating in one firm the different business units are likely to obtain different open innovation strategies and practices. Conse- quently, the first working proposition can be summarized as followed:

Working Proposition 1a: The degree of external technology commercialization activ- ities in laterally diversified firms differs across the diverse sectors in which the firm operates.

2.2.2 Characteristics of the Extrinsic Determinants

From an extrinsic perspective the most apparent characteristic is the industry in which a firm operates. A variety of open innovation studies has laid the focus on a particular industry, such as automotive (Ili, Albers, & Miller, 2010), biotechnology (Bianchi, Cavaliere, Chiaroni, Frattini, & Chiesa, 2010), consumer electronics (Christensen, et al., 2005), food (Sarkar & Costa, 2008) and financial services (Fasnacht, 2009).

Gassmann (2006) sees the military and nuclear industries as typical examples where closed innovation is the prevailing concept. Besides that, many scholars argue that there are only minor differences in the open innovation adoption rate across indus- tries (Chesbrough & Crowther, 2006; Keupp & Gassmann, 2009; Lichtenthaler, 2008; Van de Vrande, de Jong, Vanhaverbeke, & de Rochemont, 2009). However, these minor differences do not necessarily imply that the open innovation processes in different industries are similar. Although Poot, Faems and Vanhaverbeke (2009) have observed that firms across industries increasingly boost their open innovation activities, they also found that this is not a continuous trend but rather composed of shocks with different timings between the shocks across industries (Huizingh, 2010).

For a detailed case study about firm specific antecedents and conditions, an analysis of the industries in which the observed firm operates can be of high relevance to sup- port a better understanding of strategic decisions. Since it is argued that firms in dif- ferent industries adopt open innovation practices to a different degree, the same should count for laterally diversified firms which offer a variety of products and ser- vices across different industries. This leads to the following working proposition:

Working Proposition 1b: The difference in external technology commercialization activities in laterally diversified firms across sectors depends on the respective in dustry characteristics.

For the analysis of the internal context characteristics, a deep understanding of the company in relation to strategies and demographics is needed. Strategy refers to any target of the innovation strategy itself, organizational structure and culture, strategic positioning and orientation as well as other organizational characteristics affecting the firm’s open innovation performance (Huizingh, 2010). Firm specific demographics comprise static annual figures such as sales, market share and profit as well as number of employees, company age, type of ownership and even employee specific characteristics may play an important role (Huizingh, 2010).

The most often studied and most obvious company characteristic in open innovation is size. Market reach and resources of small companies are limited so the gain from open innovation has a greater impact. Many small companies externally focus their activities already from the start so openness is not a new concept to them (Lee, Park, Yoon, & Park, 2010).

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