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The Innovation Intermediary Strategies

 

A new kind of innovation intermediary has emerged to help companies to transgress their own firm’s innovation network and gain access to external technological markets. These innovation intermediaries i. e. NineSigma, Innocentive, Yet2. com, YourEncore actively connect supply and demand facets in two-sided idea and technology markets forging links between firms searching for external ideas (innovation seekers) with communities of highly- qualified solution providers (innovation solvers). such intermediaries may speed the search for possible solutions to a customer’s problems or help firms license or market internally-developed technologies that they cannot turn into products of their own.

The innovation intermediaries’ strengths are:

  •   The capability to facilitate collaboration across two facets of technology markets by developing innovation platforms that link companies match seekers with prospective innovation solvers (the second option include scientific entrepreneurs, public and private research labs, etc. );
  •   Delivering an appealing price structure for innovation seekers who only pay the innovation solver and the intermediary if and when they acquire, in-license the proposed solution. Innovation intermediaries do not pay solvers a monetary compensation for their time and effort. However, offer them valuable business access to potential end customers and allow solution providers to search business challenges through other intermediaries;
  •   Providing innovation seekers with complementary services, which include strategic guidance, technology mapping, integration services, etc.

Innovation intermediaries offer value to companies in lookup of solutions, IP, other services or resources by taking away the expensive search processes. This is particularly interesting when the supply side of the market is highly dispersed. For people and groups at the supply side innovation intermediaries provide a window opportunity to effectively commercialize their invention, solution or technology.
Innovation intermediaries typically promote the expansion of both innovation seekers and solvers because their interaction is not a zero-sum game but instead one in which adding value to one side fosters development on the other. This cross-side network effect is crucial in explaining the commercial success of innovation intermediaries. Procuring new participants on both sides of the market improves the value offered by the innovation intermediary. The remorseless logic of raising returns to scale means that two-sided markets are usually increasingly competitive and ones in which “the winner takes all”.

The rise and growth of technology markets not only drove the breakthrough of new innovation intermediaries but also promote ed value creation for their customers and ways of creaming off part of this to build a successful business. For example, in two-sided markets, intermediaries could create value by either offering an established community of solution providers (e. g. InnoCentive, NineSigma, IdeaConnection. com) or providing an IP merchant bank set-up between inventors and organizations (e. g. Ocean Tomo).

Value creation
A characteristic of innovation intermediaries is that they may create value for customers on the two-facets of technology markets. On the one facet, value is created for innovation seekers by delivering: a) entry to external networks of solution providers to deal with innovation challenges or business development partnering; b) transfer or license opportunities of IP or technologies; and c) services to build external technologies and embed open innovation within organizations. On the other side, value is produced for solvers when an innovation intermediary allows them to: a) utilize their knowledge to technological challenges; b) sell or license proprietary technologies; and c) discover possible market applications for existing technologies.
Two value creation drivers predominated in early- established innovation intermediaries – e. g. InnoCentive, NineSigma, Ocean Tomo, and Yet2. com. Innovation intermediaries created value through the complementary services required to identify and develop solutions for innovation seekers. On the other hand, innovation intermediaries could not establish ‘lock-in’ mechanisms because both innovation seekers and solvers are able conduct multi-homing and, as a outcome, innovation intermediaries lack market power.
The innovation intermediaries not only create value through enabling and handling the transactions between the two sides of the market. As a middleman they can provide other advantages to their customers. First, companies making use of the services of innovation intermediaries can remain anonymous to solution providers (and competitors active in the same innovation field). Firms seeking a solution may reveal their technological weaknesses to (potential) competitors when they search for external solutions. These weaknesses or white spots are difficult to hide in bilateral relations between solution seekers and providers.
This problem can be alleviated in triangular interaction when a solution seeker works with an intermediary between. Similarly, (large) innovation seekers may prefer to stay anonymous in order to conceal their buying power. Next, innovations intermediaries might also help solution providers in guaranteeing a fair return and legal protection of their invention.

Value capture
Innovation intermediaries have to get part of the value they generate for their customers. in most cases they subsidize the involvement of innovation solvers to boost the number of solutions for innovation seekers. This is especially the case when the chance to find interesting solutions is small and, as a result, the number of solution providers has to be greater. Although this price structure is a common characteristic in two-sided markets, value creation for innovation intermediaries takes place mostly when successful innovation seekers obtain results from their transaction with the innovation intermediary. Innovation intermediary platforms get value from innovation seekers through: a) a percentage or a fixed fee from the contract granted to winning innovation solvers; b) up-front posting fee to give an innovation challenges to external networks; and c) consultancy services. in most cases, innovation intermediaries do not capture value from the supply side because solvers’ participation is subsidized to increase the likelihood of a successful solution for innovation challenges. however, some intermediaries (i. e. Pharmalicensing, Yet2. com and ICAP Ocean Tomo) have price structure mechanisms for acquiring value from innovation solvers (IP sellers) by: a) charging a success fee or fixed commission for licensed transactions to innovation solvers; b) posting their accessible technology offers or profile; and c) charging an annual membership fee.

Value chain
The value chain of innovation intermediaries denotes internal or external resources or processes needed to fulfill innovation seekers’ and solvers’ demands in two-sided markets. Recognized innovation intermediaries have similar value chains to nurture their ‘orchestrating’ role in two-sided technology markets. First, strong network externalities are needed to engage large communities of innovation solvers capable of solving innovation challenges. Established innovation intermediaries draw on a large community of innovation solvers, which increases the likelihood of an innovation seeker getting a useful solution. Smaller intermediaries don’t have large networks of innovation solvers and have to make up for this through advertising or strategic alliances to receive innovation challenges from companies.

Intermediaries can increase the number and diversity of innovation solvers through free membership, offering training, a large pool of innovation seekers with deep pockets, exposure for winning inventors, etc. In its turn, a large network of solution providers will attract more solution seekers. Second, established innovation intermediaries may expand their internal resources to provide open innovation consultancy services to facilitate the identification, selection, development and market commercialization of technologies, while smaller innovation intermediaries outsource these services to other firms. A typical service innovation intermediaries offer is the identification of an appropriate business challenge for intermediation and its transformation from a tacit problem directly into an explicit request that is independent of technological domains, applications or industries.

Innovation intermediaries’ value chain also entails an efficient information channel to facilitate the matching of specialized technology offers and requests. Usually, this useful resource is complemented with a rich patent database and services related to patent analysis. Finally, innovation intermediaries’ will make enhancements on the value chain including: a) enhancements in software matching and codifying mechanisms; b) supply of new innovation services; and c) internationalization of its operations by means of new subsidiaries or collaborative alliances.

Market segment
In two-sided technology markets, innovation intermediaries are tempted to raise the size of innovation-solver and seeker communities to foster cross-side network effects and create value for innovation processes. The innovation seekers’ side of the market includes Blue Chip companies, not only those ranked in S&P 500 and Fortune 500 but also large companies engaged in research and new product launches . In theory, SMEs can be clients to but the up-front posting fee is usually too high for them. The innovation solvers’ facet of the market comprises: private organizations; university and government labs; private and public research institutes; retirees from various sectors from around the world. A feature of innovation-solver communities is their ability to work for several innovation intermediaries at the same time. Innovation solvers work independently from each other, but intermediaries can adjust the business model and allow solvers to get connected to each other to make groups and increase the average quality of the solutions.

Value network
Innovation intermediaries continuously search for strategic alliances with new external actors on both facets of the market. On the one side, strategic co-operative arrangements with foundations, large corporations or public institutes encourage more innovation solvers to enroll in the innovation-solver community. On the other hand, complementary arrangements with a broader range of innovation consultants; technology centers and other international innovation intermediaries enhance the service provided for innovation seekers.

Competitive strategy
The mechanisms used by innovation intermediaries to outcompete other competitors in market for technologies. Accordingly, the two major activities are:

  •   The relative network size, quality of the solutions and services of an innovation intermediary in comparison with other intermediaries determines its competitive advantage. The largest intermediaries have a competitive advantage because cross- side network effects increase when the networks at the two sides of the market increase. To the extent that network effects and increasing returns to scale play a role, it is important to create a first mover advantage. As a consequence, innovation intermediaries will do all the necessary to expand. Utek demonstrates this with the acquisition of Pharmalicensing. com, TekScout and Innovaro: This intermediary increases its network size by acquiring smaller innovation intermediaries. However, smaller intermediaries can effectively compete through a differentiation strategy;
  •   Differentiation strategies for smaller innovation intermediaries. A smaller intermediary or late entrant can face the superiority of large cross-side network effects of the larger intermediaries by bringing out new brokering services. The market for innovation intermediaries that work, as a platform in two-sided markets is quite heterogeneous seeing that offerings can be differentiated easily. Moreover, solution providers and seekers are free to practice “multi-hosting”. Differentiation may then again cause to a crowded and non-transparent market where innovation seekers will look for bundle services. In that scenario, large diversified intermediaries will become dominant players in the future.

Alternative one-sided innovation platforms
Any analysis of innovation intermediaries should take into account the innovation portals set up by several large companies such as Procter & Gamble (P&G), Unilever, Starbucks, Kraft, Pfizer, Lego and Dell. Their corporate websites connect them instantly with external innovation partners and form part of a strategic decision. As a result, these large companies take a two-pronged approach: they are clients of several innovation intermediaries and they have their own portals focusing on external innovation partners.

An advantage of corporate portals is that the firm is no longer forced to play a single role but instead can relate to many kinds of external innovators at the same time. P&G, for instance through Connect + Develop (C&D), not only looks for technical solutions to its needs but also allows website visitors to see those technologies that have applications outside P&G’s core products and markets. Yet2. com provides the search engine used on the company’s website.

Thus this strategy allows P&G to access an external network of clients, through the C&D, and simultaneously co-ordinate part of their challenges with various kinds of innovation intermediaries.
Of course, a portal only works for large companies with very strong corporate brands. It is no surprise to find that the companies involved in B2C activities are large ones with worldwide reach. Their brand names are enough well known to attract large numbers of potential external technology partners. B2B companies would find it much harder to set up a comparable network. Similarly, smaller firms would also find it tough if not impossible to create a network that was large enough to be worthwhile. The difference with communities of users established by many (small) corporations is that a technological community has to be large and global in scope to be effective. By comparison, small regional user communities may still be viable.

Organizations with a portal also benefit from their direct contact with the innovation community. This is the case when an organization is seeking for technologies for which no strategic information is pointed out on its web site dissemination. It can seek out for solutions on a permanent base instead of working on a project with an intermediary within a relatively small time frame. Similarly, it can publicise the technologies it wants to sell or license and shape the contract in a way that benefits both parties. However, this should not blind one to the advantages to working with intermediaries. First, companies have to rely on these where anonymity is required. Organizations searching for a technological solution or selling a technology do not want competitors or investors to zero in on them. In addition, intermediaries can play a important role in solving the problem of contamination. An innovation intermediary may have a much greater network of solution providers or its network might differ in some important way from that supplied by the client’s own portal. Hence a firm can still benefit from working with intermediaries even when it has its own portal.

Though the aforementioned companies aim to become the solution providers of choice, many potential partners are scared of contacting a large corporation that has many irons in the fire. Given that the company screening a proposal may also be the potential buyer, many solution providers opt to work only with neutral intermediaries. Some companies such as Dell and Starbucks use their portal primarily to get feedback from users. It is an interesting way of keeping in touch with users and gleaning direct feedback on the firm’s products and ideas. It also generates ideas for new product launches.

 

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