value creation and capture with open source software ...

Working Papers on Information Systems

ISSN 1535-6078

Value Creation and Capture with Open Source Software: A Theoretical Model for Understanding the Role of Value Networks Lorraine Morgan National University of Ireland, Galway, Ireland Joseph Feller University College Cork, Ireland Patrick Finnegan University of New South Wales, Australia

Abstract Open Source Software (OSS) is seen as an excellent exemplar of both peer production and open innovation. Nonetheless, the very concept of OSS represents phenomena that require firms to rethink their strategy as the shift in focus from ownership to one of openness requires a reconsideration of the processes that generate value creation and capture. Existing research suggests that engaging with external parties in networks or ecosystems represent growing sources of value creation and capture. The activities conducted in these networks are usually supported by traditional inter-organisational structures like hierarchies, markets and brokerages. However, the emergence of OSS as a form of peer-produced open innovation poses a puzzle for conceptions of organisational theory due to its non-reliance on markets or traditional managerial hierarchies to organise production. Additionally, the state of existing theory that focuses on the role of networks in facilitating value creation and capture process with OSS is non-existent. In responding to this gap, the paper begins a theory building process by drawing on extant research and a single case study for examining OSS value creation and capture. Based on our analysis, we theorise that an open innovation value network is extremely important for effective value creation and capture with OSS and formulate six propositions for future testing. Keywords: Open Source Software, Open Innovation, Value Creation, Value Capture, Value Network, Theoretical Model Permanent URL: http://sprouts.aisnet.org/10-82 Copyright: Creative Commons Attribution-Noncommercial-No Derivative Works License Reference: Morgan, L. , Feller, J., Finnegan, P. (2010). "Value Creation and Capture with Open Source Software: A Theoretical Model for Understanding the Role of Value Networks," Proceedings > Proceedings of JAIS Theory Development Workshop . Sprouts: Working Papers on Information Systems, 10(82). http://sprouts.aisnet.org/10-82

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VALUE CREATION AND CAPTURE WITH OPEN SOURCE SOFTWARE: A THEORETICAL MODEL FOR UNDERSTANDING THE ROLE OF VALUE NETWORKS Lorraine Morgan, National University of Ireland, Galway Joseph Feller, University College Cork Patrick Finnegan, University of New South Wales

Abstract Open Source Software (OSS) is seen as an excellent exemplar of both peer production and open innovation. Nonetheless, the very concept of OSS represents phenomena that require firms to rethink their strategy as the shift in focus from ownership to one of openness requires a reconsideration of the processes that generate value creation and capture. Existing research suggests that engaging with external parties in networks or ecosystems represent growing sources of value creation and capture. The activities conducted in these networks are usually supported by traditional inter-organisational structures like hierarchies, markets and brokerages. However, the emergence of OSS as a form of peer-produced open innovation poses a puzzle for conceptions of organisational theory due to its nonreliance on markets or traditional managerial hierarchies to organise production. Additionally, the state of existing theory that focuses on the role of networks in facilitating value creation and capture process with OSS is non-existent. In responding to this gap, the paper begins a theory building process by drawing on extant research and a single case study for examining OSS value creation and capture. Based on our analysis, we theorise that an open innovation value network is extremely important for effective value creation and capture with OSS and formulate six propositions for future testing. Keywords: Open Source Software, Open Innovation, Value Creation, Value Capture, Value Network, Theoretical Model


1.

INTRODUCTION

Open innovation is a model where firms commercialise both external and internal resources to generate value. This concept challenges the dominant view of closed innovation where it is assumed that it is the experts ‘within’ the company that invent and design innovative new products to meet customer needs (Chesbrough, 2006). However, shorter innovation cycles, the rising costs of industrial research and development, and a lack of resources have motivated a change in organizational innovation strategies towards a more open approach. Many examples of open innovation leverage what Benkler (2002, 2006) has described as peer production: a model for organising production that does not rely on markets, hierarchies, property and contracts. Specifically, the collaborative creation of open source software by development communities has been used as a defining example of the peer production model (Benkler, 2002, 2006), and the engagement of firms with such communities and the products they create has been identified as a key exemplar of open innovation (West and Gallagher, 2006). Like open innovation, OSS involves collaboration between firms, suppliers, customers and makers of related products to pool software R&D (West and Gallagher, 2006). Additionally, the development of OSS is evident as commons-based peer-production (CBPP); “a model of social production, emerging alongside contract- and market-based, managerial-firm based and state-based production” (Benkler and Nissenbaum, 2006, p. 400).

Unlike

hierarchical and market modes of production, CBPP is characterised by (i) decentralisation of action and decision-making and (ii) utilisation of social cues instead of prices or managerial authority as a means of motivating and organising efforts (Benkler and Nissenbaum, 2006).


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However, the very concept of OSS as a form of peer-produced open innovation require all types of firms to rethink their strategy as the shift in focus from ownership to one of openness requires a reconsideration of the processes that facilitate value creation and value capture. Research suggests that engaging with external parties in networks or ecosystems represent growing sources of value creation and capture (Chesbrough, 2006). Nonetheless, it has been suggested that firms utilising an open innovation community must identify ways to recruit contributors, keep them engaged and avoid the perception of being co-opted by agendas at odds with the values of that community (Chesbrough and Appleyard, 2007). Network activities are usually supported by traditional inter-organisational structures like hierarchies, markets and brokerages. However, the emergence of OSS poses a puzzle for conceptions of organisational theory due to its non-reliance on markets, contracts or traditional managerial hierarchies to organise production (Benkler, 2002, 2006). Thus, the objective of this paper is to theorise on the role of networks in facilitating firm value creation and capture with OSS. This paper describes the results of a theory building process based on analysis of extant theory and a single case study; delineating constructs and the relationship between these constructs in the form of theoretical propositions.

2.

BUILDING THE THEORY

Over the years, the most frequently voiced question for firms is how to sustain competitive advantage. More recently, however, this question has transformed into how firms create and capture value.

However, little research has directly focused

on these fundamental questions in general.

Indeed, research has only paid lip

service to the notion of value creation, with the vast amount of it focussing on value


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appropriation for sustainable competitive advantage (Nickerson et al, 2007). While value creation and capture have been identified as two important dimensions of a business model, much of the managerial and academic interest in business models concentrate on how to appropriate value from new Internet-enabled businesses (West, 2007). While the current literature on value creation and value capture processes with OSS is sparse, both processes have been touched on using several theoretical perspectives. In this study, we use a process of theory building proposed by Dubin (1969) and Whetten (1989) that consists of analysing extant research and delineating constructs and the relationships between them in the form of theoretical propositions. Specifically, we analyse extant literature on (1) value creation and value capture with OSS and (2) existing theoretical frameworks that review value creation and value capture in general. Given the scarcity of theoretical work in the area of OSS value creation and capture, we also use a single case study as part of the theory-building process.

2.1

Case Organisation and Data Collection Procedures

A major reason for building theory from case studies is that they form one of the best bridges from rich qualitative evidence to mainstream deductive research. Its emphasis on developing constructs and testable theoretical propositions make inductive case study research consistent with the emphasis on testable theory within mainstream deductive research. Additionally, since it is a theory-building approach that is deeply embedded in rich empirical data, building theory from cases is likely to produce theory that is accurate, honest, interesting and testable (Eisenhardt and Graebner 2007).

The case organisation is a supplier of medial equipment and

devices and designs imaging systems, including X-ray, ultrasound and magnetic resonance machines that enable radiologists and cardiologists to study images of


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the human body. The company has grown rapidly in recent years, largely through acquisitions.

Today the company employs 30,000 employees and has dual

headquarters in the USA and the Netherlands. Open source software is not formally part of the company strategy, but considered complimentary to the core business model. While the company utilise a small percentage of OSS in their products, they see a lot of value in open source tooling. For example, the company and its partner company decided to release a toolkit they created in 2000 as OSS in June 2005. This toolkit is licensed under the LGPL, the source code is available at the SourceForge website and the software is freely available for download. While the tool itself is free and does not generate any direct revenues to the company, the long-term goal of the company is to create a larger and more active community that could use the toolkit, report on bugs and help in the development. Thus, the overall value that this company perceive as worthy with OSS is that it is good quality software and helps reduce maintenance costs as there are others outside the organization that help maintain the software. In addition, OSS speeds up innovation in the company and permits collaboration and cooperation with multiple stakeholders. This company also utilise open source practices in the distributed development of their product line – something termed inner source. This model facilitates internal collaboration and networking in an open manner between product teams in the firm.

Those that participated in the study included the International Partnership Project Manager, the Director of Software Services, one Software Team Leader, the Program Manager for Interoperability and Security, a Development Manager and a Business Architect. A case study protocol (cf. Yin, 1994) was prepared and data was gathered over a four-week period. Data gathering techniques included face-to-


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face interviews

and telephone interviews,

which were tape-recorded and

transcribed. Interviews were complemented by a comprehensive review of publicly available documents. The choice of interviewees was based on (a) their willingness to cooperate and (b) the company’s history of engagement with OSS. Interviews, conducted using an interview guide (cf. Patton, 1980), were generally of one to two hour duration, with follow-up telephone interviews used to clarify and refine issues that emerged during transcription.

2.2 Data Analysis Interview data was transcribed, generating on average 100 pages of field notes. Data analysis was undertaken using grounded theory coding techniques proposed by Strauss and Corbin (1990). The first step (open coding) involved the data being examined “line by line” to ascertain the main ideas. They were then grouped by meaningful headings (also informed by constructs that had emerged from the analysis

of

the

theoretical

frameworks)

to

reveal

categories

and

subcategories/properties. The next step (axial coding) was the process of determining relationships between categories and its subcategories. As a list of codes began to emerge, the analysis moved to a higher or more abstract level, looking for a relationship between the codes. Once a relationship was determined, the focus returned to the data to question the validity of these relationships. The final step (selective coding) involved determining a core category; that category that is connected to most of the other categories. The issues of trustworthiness (validity) and replicability (reliability) (cf. Denzin and Lincoln, 2000) were addressed as follows. First, the data analysis approach utilised rigorous coding and memoing processes providing an audit trail of the process by which conclusions are reached.


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Second, venting (cf. Goetz and LeCompte, 1984) was used as results and interpretations were formally discussed with respondents.

2.3

Traditional Approaches to Value Creation

Value creation is a universal dimension found in recent conceptions of business models, and necessitates identifying a relevant customer segment, the value proposition for those customers, and the ways in which the business model will provide that value (Chesbrough and Rosenbloom, 2002; Morris, 2005; West, 2007). In West’s (2007) study of OSS business models in IT vendor firms, business buyers were identified as the relevant customer segment, and lower costs and avoidance of vendor lock-in were identified as the key value propositions. In addition, this study found that as business buyers expect a richer “whole product” solution including integration, customization, support and other services, OSS vendors had the opportunity to combine priced and un-priced complementary assets to create value. Complementary assets, also called complementarities (Amit and Zott 2001), are those assets (such as resources, capabilities, know-how, goods or services) that surround the successful commercialization of an innovation (Teece, 1986; Dodgson et al., 2008). However, these complementary assets are often to be found in a value network (West, 2007).

2.3.1

Transaction Cost Economics

The concept of transaction cost economics (TCE), first introduced by Coase in the late 1930s as a first attempt to explain why firms exist (cf. Coase 1937) and later extended and developed by Williamson (1981), is essentially a single company oriented analysis of cost minimization where transaction efficiency is identified as a


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major source of value, i.e., enhanced efficiency reduces costs.

Furthermore,

organizations that economise on transaction costs can be expected to extract more value from transactions (Amit and Zott, 2001). This theory emphasises that companies

choose

for

their

economic

exchange

arm-length

transactions,

hierarchical control or intermediate governance modes, e.g. joint ventures, strategic alliances etc. in order to reduce transaction costs (Vanhaverbeke et al., 2007). However, one of the limitations of this theory is its stringent focus on transactions and the view of the boundaries between market and hierarchy (Rajala and Westerlund, 2005). As already mentioned, OSS projects do not rely either on markets or on managerial hierarchies to organise production. While research on open source through a TCE lens is in its infancy (Niederman et al, 2006) it has also been found that the emphasis of transaction cost economics on efficiency may divert attention from other important sources of value such as innovation and the reconfiguration of resources (Ghoshal and Moran, 1996). In addition, TCE’s focus on cost minimisation and neglects innovation (Lazonick, 1993) and the mutual relationship between exchange parties and the opportunities for value creation that this presents (Amit and Zott, 2001).

It has also been found that partners in open innovation are not interested in transaction cost minimisation (Vanhaverbeke et al., 2007); in the pursuit of transactional value they will choose cooperative and collaborative modes with higher transaction costs, as long as eventual joint gains prevail over transaction costs (Zajac and Olson, 1993). This was especially true in our case study where it was found that a firm’s ability to access a network of potential complementors is extremely important as it allows them to access and transfer valuable strategic resources and capabilities in the form of skills, expertise, knowledge and experience


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of others, which in turn maximises value creation for the firm, their customer and the network as a whole. Thus, there is a high frequency of networking and ongoing collaboration with third party complementors, customers, communities, universities and hospitals. By networking with these complementors, this company gets access to “sparring” partners” outside their company that can answer questions that cannot be answered or solved within their own organisation.

2.3.2

Value Chain Analysis

Porter’s (1985) value chain framework analyses value creation at the firm level and addresses the activities a firm should perform. It also examines the configuration of the firm’s primary and support activities that would enable it to add value to the product and to compete in its industry. The goal of these activities is to create value that exceeds the cost of providing the product/service. Porter suggests that in order for a company to deliver customer value and satisfaction, they must manage the value chain. Value can be created through differentiation along every step of the chain resulting in products and services that lower buyers’ costs or raise buyers’ performance. However, this type of framework was found to be more suitable to describing and understanding value creation in a traditional production and manufacturing company and less so in service industries where the resulting chain does not fully capture the real meaning of value creation (Stabell and Fjeldstad, 1998). In addition, this framework focuses on value creation as a linked chain of activities; a perspective that leads to the development of strategies that concentrate on controlling this chain (Peppard & Rylander, 2006). Porter (1985) further argues that a firm’s value chain links to the value chain of both suppliers and of buyers of products and services, resulting in a large stream of activities called the value system. However, there is a major distinction between value creation in the open


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innovation and open source context and within the classical value system.

For

example, while every company in the classical value system occupies a particular position within the system and adds value to inputs before passing them on to the next actor in the chain, relationships between these actors (e.g. suppliers, substitutes, etc.) can be described as simple exchange relations, mainly dealt with by means of arms-length transactions. As Vanhaverbeke et al. (2007, p.5) point out, “managing and organising requirements are restricted to activities within the firms. There is a clear distinction between firms and markets; outside the firm boundaries only markets exist”. Additionally, in open innovation, firms jointly create value through a number of non arm-length transactions in value networks (Vanhaverbeke et al. 2007).

2.3.4

Knowledge-Based View of the Firm

In contrast to the Porterian model and TCE-based theory, the knowledge-based view treats knowledge as a key resource underlying value creation (Grant, 1997). Originating from the strategic management literature, the knowledge-based view of the firm (KBV) has largely extended that of the resource-based view (RBV) of the firm.

While RBV tends to focus on value appropriation (Kapler, 2007), the KBV

treats knowledge assets as a strategic competitive advantage and strategy of the firm. Kang et al. (2007) suggests that a firm’s success rests on its ability to offer new and superior customer value, which in turn relies on its ability to explore and exploit employee knowledge that can become the basis for significant innovations that create value for targeted customers. In addition, a knowledge-based perspective suggests that organizations that have superior knowledge resources are able to coordinate and combine their traditional resources and capabilities in new and distinctive ways (Teece et al., 1997). However, the existing literature on KBV


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has some significant shortcomings. For example, this approach has been criticised for its lack of empirical literature. Indeed Eisenhardt and Santos (2002) point out that while KBV as a theory of strategy rests on the assumption hat knowledge is the most important resource, there appears to be very little empirical evidence to substantiate this. In addition, many of the perspectives on KBV are quite static in that they see the control and protection of knowledge as the basis for sustainable competitive advantage because it is the most difficult to imitate (Eishenhardt & Santos, 2002; McEvily & Chakravarthy, 2002; Liebeskind, 1996). In other words, the dominant view is how best a firm can accumulate, apply, integrate and protect knowledge inside a firm. From an open source and open innovation perspective, a firm’s knowledge should extend beyond its boundaries and enable knowledge flows with other firms. When a firm increases its internal knowledge base by bringing in external knowledge, it can use this new knowledge to generate new innovations (Vanhaverbeke et al., 2007). This was also found to be true in our case study where it was revealed that the more knowledge that is exchanged beyond the firm boundaries, the more this increases innovation in the company and facilitates more interaction and learning. Additionally, the company often possess knowledge of no real value to the organisation.

This knowledge is often generated to network

participants who may find it beneficial, resulting in relationships in the network being further strengthened.

2.3.5

Dynamic Capabilities

Dynamic capabilities is another body of literature in the field of strategic management concerned with examining how organizations create value by developing new capabilities and competencies in a dynamic environment (Teece et al., 1997). Dynamic capabilities are those organizational and strategic routines that


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lead managers to alter their resource base, i.e. obtain and shed resources, integrate them together and recombine them, to generate new value-creating strategies (Eisenhardt and Martin, 2000; Grant, 1997; Pisano, 1994).

However, some

researchers remain sceptical about the nature and role of dynamic capabilities. It has been argued that few empirical studies have engaged in defining, operationalising and measuring the impact of dynamic capabilities on firm performance. (Protogerou et al., 2005). Thus, the “emergent literature on dynamic capabilities and their role in value creation is riddled with inconsistencies, overlapping definitions, and outright contradictions” (Zahra et al., 2006, p. 918).

2.3.6

Schumpeterian Innovation

In Schumpeter’s (1934) theory, innovation is the source of value creation. Schumpeterian innovation emphasizes the importance of technology and considers novel combinations of resources and the services they provide as the foundation of new production methods, which in turn lead to the transformation of markets and industries (Amit and Zott, 2001). However, open innovation and OSS broaden this idea of innovation since these models spans firm and industry boundaries, involving new methods of exchange and collaborative development, rather than simply new production processes. Indeed our case study revealed that in order to speed up innovation in the company, it is important to build relationships and continuously network. In this regard, open source was considered one of the best models for cooperative and collaborative development.

2.4

The Importance of a Value Network for Value Creation

The above frameworks have some shortcomings in theorising on value creation with OSS. For example, models like transaction cost economics and the value chain


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framework do not account for the nature of alliances, competitors, complementors and other members in value networks (Peppard and Rylander, 2006). OSS and open innovation differ from the TCE approach in that TCE focuses on minimising costs in order to create value, rather than maximising value through cooperative modes in networks. In addition, the knowledge-based view of the firm focuses on knowledge that is controlled within the firm while OSS and open innovation is concerned with combining and exchanging knowledge in value networks. Additionally, many of these theories focus on traditional inter-organisational relations that take an arm-length transaction-oriented focus. However, a key difference with the concept of an open innovation value network is that equal importance is placed on the role of external knowledge as well as internal knowledge as a source of innovation. In prior theorising about innovation, external knowledge played a useful but supplemental role as the firm was the locus of innovation and internal activities the central object of the study (Chesbrough et al., 2008). This is all in contrast to the emphasis placed on interaction and the importance of joint value maximisation in value networks. Value networks are key conduits through which knowledge flows from the environment to the firm and vice versa (Simard and West, 2008). Indeed, they are viewed as vehicles for producing, synthensising and distributing ideas and increasingly the success of a firm is linked to the depth of their ties to network partners. Thus, innovation is positively influenced by a firm’s access to complementary skills and a broad knowledge-base that facilitates different types of knowledge exchange in a network context (Simard and West, 2008).

The importance of networking was evident in our case study findings where it was pointed out that “to survive, we have to do this, we need to have this open networking model” (Software Team Leader) and “you cannot do everything yourself,


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so therefore you need to give something to get something back” (Partnership Project Manager). For this company, the target customer are doctors in hospitals who use the company’s equipment mainly for treatment and research purposes. Often there may be certain software the customer wants and in a lot of cases this can only be obtained with OSS.

Thus, there is a high frequency of networking and ongoing

collaboration with third party complementors, communities, universities and hospitals. For example, the company collaborate with universities and hospitals that do medical research and experiments, which in turn helps improve the overall product offering. In addition, they work with third party complementors who provide certain parts of the product and services, which again improve the company’s value creation to the customer.

Research also suggests that value networks take a more holistic view of value creation and constitute four dimensions – value creation, transactions, the combination of resources and capabilities of different partners and finally networking. However, they have to be considered jointly to understand the process of value creation and cannot be sufficiently addressed by theoretical frameworks that only address one of these dimensions (Vanhaverbeke and Cloodt, 2008), such as those listed in the above section, which neglect the importance of combining the resources/capabilities of various partners outside the firm and networking. Value networks are entities consisting of several connected individuals or organisational actors that transform and transfer various resources in order to create value not only for the network’s end customer but also for themselves (Helander and Rissanen, 2006). A network offers the firm the potential to share risk, generate economies of scale (Katz and Shapiro, 1985; Shapiro and Varian, 1999), share knowledge and facilitate learning (Dyer and Nobeoka, 2000; Dyer and Singh, 1998). In other words,


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networks provide firms with opportune access to knowledge and resources that are otherwise unavailable, while also testing internal expertise and learning capabilities (Powell, 1998). When these networks work, they allow firms to create value that no single firm could have created alone (Adner, 2006).

In a value network environment, organizations focus not on the firm or industry, but on the value-creating system itself, which includes suppliers, partners, allies and customers and other network players working together. The firm focuses on creating value, where value is determined by the resources and capabilities assembled and combined by different partners and how well they perform joint tasks (Vanhaverbeke and Cloodt, 2008; Hamel, 1991). The importance of communities and competitors in a firm’s value network have also been highlighted by West (2007) and Dahlander (2004), as these stakeholders often collaborate to further develop or stimulate adoption of a shared technology. For example, Nokia and Sony Ericsson are two such competitors that collaborate in a value network, i.e. the open source Eclipse foundation, to simplify mobile development. Additionally, our case findings revealed that the company are trying to incorporate more open innovation practices in the company and currently trying to establish some projects and relationships with one of their major competitors. We also found that the development of value networks usually occur as a result of certain employees representing the company in collaborative research funded OSS projects involving national and international research institutes, companies, universities etc. These established linkages often tend to manifest themselves in other departments in the organisation with common areas of interest in OSS.

Over the years, these cooperative linkages tend to

become more personal with employees exchanging information and ideas on a regular basis with individuals in other organisations in an informal capacity. We,


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therefore, identify the following construct along with some empirical indicators (see Table 1) for use in our study and present our first proposition:

Construct Value Network

Explanation Entities of several connected individuals/organisational actors that transform and transfer various complimentary resources and capabilities

Indicators • Firms believe they will gain access to knowledge, skills, experience and expertise of others • Firms believe that their reputation is enhanced as a result of network membership • Firms believe they will benefit from the knowledge, skills and expertise of others in a network • Table 1: Empirical Indicators for Value Network Construct Proposition 1: Gaining access to a value network is critical to the ability of a firm to create value with OSS.

In a value network, value is co-created or co-produced. Thus, companies with complementary capabilities have to be fully committed to cooperate in the value network. Our case study found that the level of commitment displayed by various members in a network to be extremely influential in facilitating value creation with OSS. If the level of commitment is not visible in a network, then various participants will not contribute the required resources, which in turn has a negative impact on value creation.

Thus, long-term commitment and building trust is vital and this

needs to be demonstrated continuously.

However, achieving commitment in a

network can be difficult as this is not something that is in the hearts and minds of all stakeholders. Often there are conflicts of interests that need to be addressed on a continuous basis. In addition, substantial knowledge exchange in a network leads to value creation as it facilitates joint learning, fosters problem-solving, and the integration of complementary resources enables joint creation of products,


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technologies and services (Parise and Henderson, 2001). This was also the case in our study where a high volume of knowledge exchange in a network was believed to be extremely important as access to new and diverse knowledge facilitates superior value creation. The company also organise seminars and meetings where members from the network are invited to participate. In some instances, the travel expenses incurred by members are covered by the company. Thus, these events display a greater commitment and facilitate a higher level of knowledge exchange between participants.

It has been suggested that creating value cannot be done based on only the efforts of a single, focal firm, nor can it be done without keeping in mind the different and divergent interests of all collaborating partners (Vanhaversbeke 2008, p. 218). Therefore, the value a firm creates from being part of a network depends on how well partners’ objectives are aligned to each other and on partners’ commitment to invest in complementary assets (Teece, 1986; Moore, 1991). The successful alignment of objectives in a network was also viewed by as being crucial in facilitating value creation in our case study.

However, while objectives need to be

aligned, inevitably each participant will have different objectives. As one interviewee pointed out, ““we want to improve our equipment and they (hospitals) may experiment with them. They can do their treatments better. That’s the idea. We learn how to improve the system in such a way that it is of real value to the market…and these are different objectives but we both come to the same thing” (Developmental Manager). The important thing is that there is common ground between all members in a value network, otherwise the network won’t survive. If objectives are not aligned, this may result in a major split of opinion in direction, and if network participants waiver off in different directions, this would send out unclear


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messages to other members. Thus, a clear vision and strategy that comprises a win:win situation for everyone in the network is vital. We can, therefore, delineate the following constructs for use in this study along with some empirical indicators (see Table 2) and present our second proposition:

Construct

Explanation

Indicators

Commitment

The degree to which network participants’ express a willingness and desire to establish a cooperative effort and sustain a valued relationship

Knowledge exchange

The degree to which network participants exchange ideas and knowledge in a reciprocal manner

• Members engage in continuous sharing of expertise/competencies with members • Members contribute financial support • Members display a high frequency of collaboration with all network participants • Network members hold public events and forums • There is mutual learning and innovation as a result of diverse and new knowledge that is exchanged • Interactions among members are based on mutual trust • Members share a common vision and goal • There is a win-win situation for all participants • There is joint problem-solving in the network • Members display good communications in the network

Alignment of objectives

The degree to which the network identifies and integrates divergent objectives and goals in order to achieve a shared understanding of performance requirements for superior value creation and capture Table 2: Empirical Indicators with Commitment, Knowledge Exchange and Alignment of Objective Constructs Proposition 2: The greater the level of commitment, volume of knowledge exchange and alignment of objectives in a value network, the greater the potential for firms to create value with OSS.


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Successfully ensuring alignment of objectives and partners’ commitment, however, relies on two important issues. First, the firm has to structure and manage the value network so that the potential of the network to create joint value is maximised. Secondly, it has to make agreements with network participants to share this jointly created value (Vanhaverbeke and Cloodt, 2008). Thus, resources and capabilities of network actors have to be effectively combined and governed at the network level. Most importantly, firms will need to choose an appropriate governance mode for its relations with each network partner. Some form of governance is necessary to ensure that network participants engage in collective and mutually supportive action, that conflict is addressed, and network resources are acquired and used efficiently and effectively (Provan and Milward, 2001). Trust, leadership and a unifying vision play an important role in bringing disparate partners together in a network and the absence of internal competition among participants in the network is crucial (Gomes-Casseres, 2003). Thus, the firm will have to actively nurture the value network to manage potential tensions or conflict between participants. Additionally, the firm has to make a number of arrangements with other participants to stick to the network, e.g. offer incentives such as access to information and knowledge, compensation etc. (Vanhaverbeke and Cloodt, 2008).

Our case findings also reveal that frequent exchange through continuous interaction, shared values, commitment, trust and reciprocity are crucial in effectively combining and governing resources and capabilities in a network. However, involvement in open source projects and communities is subject to reviews and advice from legal departments. Subject to successful reviews, the exchange conditions that follow in the network are very informal, especially at the operational level. interviewee pointed out, “there are no boundaries for engineers.


As one

They just co-

19

operate but managers often struggle as this is where the politics start” (Director of Software Services). We can, therefore, identify the following construct along with some empirical indicators (see Table 3) and present our third proposition:

Construct Governance

Explanation The degree to which the resources and capabilities of different stakeholders in the network are successfully combined and managed

Indicators • There are formal and informal safeguards in place • There is a great deal of trust among network participants • There is good leadership, continuous interaction and transparency • There is fair exchange in the network Table 3: Empirical Indicators for Governance Construct Proposition 3: Effective governance of a value network leads to greater value creation with OSS.

2.5

Traditional Approaches to Value Capture

Value capture or value appropriation explains how a firm captures value from its value creation in order to sustain the business model (West, 2007). Some of the key steps in formulating a value capture strategy are defining a revenue model; ensuring the cost structure is consistent with the customer’s perception of value (Amit and Zott, 2001), and establishing durable external relationships between the firm and customers and third parties (Chesbrough and Rosenbloom, 2002). Open source software has limited appropriability, and thus reduced potential for value capture, compared to proprietary software because the source code is available for reuse and modification by competitors, customers and complementors. Therefore, the revenue model focuses on the sale of complementary goods and services to complete the whole product solution.


In terms of establishing durable external

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relationships, firms make source code open in the hope of attracting external contributions from third parties and competitors. Other value capture strategies include non-monetary gains such as access to tacit knowledge and an excellent reputation useful in marketing. As with value creation, complementary assets play an important role in capturing value from an innovation and so the innovator must entice third-party suppliers of these complementarities to complete the innovation. Yet again, a firm’s position in a value network of potential complementors determines the value captured.

2.5.1

Neoclassical Theory

Traditional neoclassical theory focuses on value captured in the form of monopoly rents (Lazonick, 1993, Moran and Ghoshal, 1996; Pitelis, 2002). A typical neoclassical firm controls the transformation of inputs (resources it owns) into outputs (sale of products) and earns the difference between what it receives in revenue and what it spends on inputs. In this theory, firms compete based on price but as Baumol (2002) argues, innovation rather than price is the primary competitive dimension and less innovative firms will find their markets shrinking as they lose business to more innovative competitors. It has also been argued that this theory views the firm as essentially a perfectly efficient ‘black box’ concerned with maximising profits and has nothing to say about the internal organisation of the firm or innovation for that matter (Hart, 1995; Teece, 1986). Thus, OSS innovation is not easily explained in neoclassical economic terms.

The production of goods in a

neoclassical firm includes a formal division of labour that uses proprietary knowledge, is guarded by restrictive IPR and managed ‘within’ a hierarchy that guides and governs the process. In contrast, OSS production and distribution is practically based on the absence of a hierarchy and is fundamentally about


21

cooperation and collaboration. For example, collaborative OSS projects such as Linux and Apache have demonstrated empirically how the production process takes place in a voluntary community-based setting with developers working in a highly parallel, relatively unstructured way and without direct monetary compensation (Weber, 2004).

2.5.2

Industrial Organisational Theory

Industrial organisational theory of the 1950s and 1960s is useful in determining the likely profitability of an industry and in turn the value appropriated by firms (Porter, 1981). The firm in traditional industrial economics focuses on market structure. In this approach, exogenous demand and supply conditions determine industry structure, which in turn determines the conduct of firms, and performance depends upon various properties of the industry including the degree of concentration, barriers to entry, product differentiation and the presence of scale economies (Porter, 1981; Seth and Thomas, 1994). However, it has been argued that this view is characterised by the same black box metaphor as the neoclassical approach, treating the firm as a product of deterministic forces and ignoring inter-firm differences (Seth and Thomas, 1994). In addition, this view has been criticised for it preoccupation with value captured in the form of monopoly rents as the basis for explaining and predicting firm performance (Moran and Ghoshal, 1996; Pitelis, 2002). Yet again, open innovation and OSS suggest activities that are the opposite extreme of this theory. Open source software is not about erecting barriers to entry and excluding potential rivals. Rather, OSS promotes anti-rivalry and inclusiveness. These two dimensions result in positive network externalities where cooperation between contributors becomes the rule, not the exception (Cooper, 2005).


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2.5.3

Value Chain Analysis

The concept of value chain analysis has focused on ways in which firms may configure their primary and support activities to maximize and sustain competitive advantage (Porter, 1985).

According to Porter, ‘value is measured by total

revenue…a firm is profitable if the value it commands exceeds the costs involved in creating the product’ (1985:38). However, as with value creation, the value chain model appears to be more suited to describing and analyzing a traditional manufacturing firm and less suited to the analysis of activities in service industries (Stabell and Fjeldstad, 1998). In addition, the value chain analysis is an incomplete instrument for analyzing value capture with OSS since it does not span firm boundaries and value capture is measured solely in monetary terms. Contributors to OSS also value non-monetary gains such as recognition, access to code and technical knowledge. Our case findings also revealed that the company place more emphasis on the non-monetary gains captured in a network.

For example,

communicating and cooperating in a network and sharing experiences and expertises while capturing valuable knowledge, skills and ideas was viewed as extremely beneficial and something that ‘was fun to do’.

2.5.4

Resource-Based View of the Firm

The resource-based view (RBV) of the firm is also concerned with questions of value appropriation and sustainability of competitive advantage (e.g. Barney, 1997). This view conceptualizes the enterprise as a bundle of resources and capabilities. In order to create and sustain competitive advantage and capture above-normal rates of returns, these resources must be scarce, valuable and reasonably durable (Barney, 1997).

According to Barney (1997, p. 147), a firms’ resources and

capabilities are “valuable if, and only if, they reduce a firm’s costs or increase its


23

revenues compared to what would have been the case if the firm did not possess those resources”. In addition, the RBV places greater emphasis on the prevention of other firms from appropriating the firm’s own existing rent streams (Moran and Ghoshal, 1996). Furthermore, proponents of the resource-based view emphasize that a sustainable competitive advantage is based on those resources and capabilities that are owned and controlled ‘within’ the boundaries of a single firm (Dyer and Singh, 1998). From and OSS and open innovation perspective, however, resources should not be closed off within one single firm. Rather, durable, valuable and scarce resources of different firms should be combined in order to capture value (Vanhaverbeke, et al., 2007). Indeed, sharing and combining resources and capabilities in a network, according to our case study, was essential in capturing value.

As one interviewee explained “the economic value of simply sharing

resources and then making something that makes everybody happy, that’s an easy sum to make” (Partnership Project Manager).

2.6

The Importance of a Value Network for Value Capture

It is evident that the above theoretical frameworks for value capture are based upon ownership and control as the key levers in achieving strategic success and aim to protect, rather than share, valuable resources and capabilities that are housed within the firm. All focus largely within the firm and take no notice of the potential value of external resources (such as those of a value network) that are not owned by the firm in question (Chesbrough and Appleyard, 2007). From the OSS and open innovation perspective, resources should not be closed off within one single firm. Rather, durable, valuable and scarce resources of different firms should be combined in order to capture value (Vanhaverbeke, et al., 2007). While Porter’s


24

value-chain analysis may be somewhat valuable in examining open innovation and value networks, value is determined by the performance of individual partners, not by the cohesion and structure of the network as a whole (Vanhaverbeke and Cloodt, 2008). Additionally, while the RBV stresses issues like independence and the role of competition between firms based on the unique resources and capabilities it possesses, in contrast OSS and open innovation emphasise the interdependence of complementary resources of firms in a value network in order to introduce a new innovation to the market (Vanhaverbeke et al., 2007).

As with value creation, the value network created around a business shapes the role that suppliers, customers and third parties play in influencing the value captured from commercialization of an innovation (Chesbrough and Rosenbloom, 2002). In an OSS value network, firm often gain a large pool of users and third-party complementors to increase the value of their product/service. Users often reveal their internal complements for use by others because they may not be able to capture value from minor improvements, or because they gain other benefits from the disclosure, e.g. recognition. One such example is the contribution of foreign language translations as is the case of Zend with PHP and Sun Microsystems with OpenOffice (West, 2007). Additionally, for our case organisation, the value captured in an OSS value network is good quality software, operational excellence in the form of knowledge that certain people in the network possess about the software, access to knowledge about the ideas behind the software, how it is built etc., and an excellent reputation for the company as a result of participation in the network. This value captured enables competence building in the company because they are continuously learning from others and sharing experiences. In addition, the company have less rework and less problems with their product as a result of collaborating


25

and working with complementors.

For this company, profits are not the most

important thing. Rather, access to knowledge, code and competences outside their own organisation is considered more important and something that “is very difficult to translate into euros” (Developmental Manager). As with value creation, we can identify the same construct, i.e., importance of a value network, for value capture and present our fourth proposition: Proposition 4: Gaining access to a value network is critical to the ability of a firm to capture value with OSS.

In a value network, value capture has to be considered jointly with the value creation strategy because in both cases the commitment of the participants, the alignment of their objectives, and the exchange of knowledge among them, determine the amount of value captured (Vanhaverbeke and Cloodt, 2008). For example, Peppard and Rylander (2006) argue that the flow of knowledge and other resources in the network is vital for its sustainability. Firms can capture value by developing superior knowledge-sharing routines with partners in the network. This, however, is dependent on incentives that encourage partners to be transparent, to transfer knowledge and prevent free riding on the knowledge acquired from the partner (Dyer and Singh, 1998). In addition, each participant should capture some value from its contribution to the network. Two factors determine the strength of the value network: the extra value created in comparison with competing value systems, and the commitment of the different participants in the network. In our case study findings, the commitment of all participants in a value network was considered crucial in capturing value. As one interviewee explained, “if commitment is low, then the value captured will also be low” (Partnership Project Manager). Additionally, the motivation needs to be there among network participants to stay committed to the


26

network because “in some cases, it can take a long period of time before you see results” (Developmental Manager).

Additionally, a high volume of knowledge

exchange was viewed as being very important in capturing value.

Good

communications and collaboration with network members is vital in this regard. However, this is not something that is easy to achieve.

As was pointed out

“collaboration is not easy, it is not going to come by itself. So you need a mindset of collaboration. That’s very important.

Additionally, if you co-operate with many

partners, things can and often do go wrong. To recover from that very fast, you need to have quite a stable base.

Otherwise you are in an endless tragedy”

(Software Team Leader). Thus, it is important that objectives are aligned and members work towards the same goal, otherwise the network has the potential to fall apart. Similar to the constructs identified in the section on value creation, we can identify that commitment, knowledge exchange and the alignment of objectives in a network are important for value capture with OSS and present the following proposition: Proposition 5: The greater the level of commitment, volume of knowledge exchange and alignment of objectives in a value network, the greater the potential for firms to capture value with OSS.

It has been further suggested that each participant reap some benefits to ensure that one stays committed. Fair distribution of value in a network is also important because while some participants are automatically better off in the network, others might be worse off and have to receive some return in order to stay committed to the value network.

Thus, the value captured in a network depends on how well

participant resources are combined and managed within the network. In order to optimise value capture, a firm will have to orchestrate the network partners, lead and


27

nurture them while minimising any potential tensions and instilling a unifying vision (Vanhaverbeke and Cloodt, 2008). Our case study findings revealed that in general there are steering committees, internal reviews and formal agreements in place to oversee relationships and project exchanges with all external stakeholders.

In

addition, if a network is quite large, a code of behaviour is often required and one “probably needs to become a bit more strict”.

However, a win:win situation for

everyone is vital in order for people to continue participating and contributing to the network. If communications are effective and there is a common vision and high level of commitment, typically a lot of trust builds up over time in the network and as a result, little problems are experienced and value capture is optimised. We can, therefore, also identify the importance of governance for value capture with OSS and present our final proposition: Proposition 6:

Effective governance of a value network leads to greater value

capture with OSS.

3.

DISCUSSION AND CONCLUSION

We now conclude our process of theory building by presenting the constructs and the relationship between them in Figure 1. On the one hand, the theoretical approaches presented in this study are useful in theorising on value creation and capture with OSS e.g. minimizing transaction costs (TCE), combining unique resources and capabilities (RBV) and configuring firm activities to create and capture value (Porter’s value chain analysis). On the other hand, value creation and capture with OSS cannot be sufficiently addressed by such theoretical frameworks that only emphasise one particular dimension of the process. After all, the dominant argument that has emerged from this research is the need for a value network in


28

order to successfully create and capture value with OSS. Thus, a more integrative theory is needed in future research, one that jointly considers all dimensions including networking. A theory of the firm could be developed based on our first steps towards a framework for value creation and capture with OSS. In this regard, Figure 1 and the propositions could provide direction as to what a more complete conceptualisation of value creation and capture with OSS entails.

Figure 1. Theoretical Model of Constructs and Relationships

While the theoretical frameworks and the single case study analysed in this study provide a useful first step in the theory-building process, the external validity of our proposed model needs to be empirically tested in a much larger sample in order to generate hypotheses for further refinement of the model. In the words of Wheeler (2002), “theories provide an essential step in the research process, but until real-


29

world data provide supporting evidence, they remain only a proffered representation of real-world phenomenon” (p. 139). Each of the constructs were discerned from empirical indicators. However, any hypotheses derived from the propositions should focus on one or two constructs at a time to establish construct validity and to discern which empirical indicators provide the best evidence. This evidence may refute or support the proposed theoretical model in this study.

Our framework should also provide useful guidance for practitioners. For example, the framework makes clear that a firm’s ability to create and capture value with OSS is supported or constrained by their ability to gain access to a value network. High levels of value creation and capture are not likely to develop if companies attempt to or continue to operate within the boundaries of the organisation. Active membership of a network and maintaining sustainable relationships, however, depends on the level of commitment, volume of knowledge and how well a firm’s objectives are aligned to other partners in the network. In addition, firms can generate and capture more value with OSS through the effective combination and governance of resources and capabilities of all actors in the network. Thus, the holistic view of the framework can be effectively used to focus an organisation’s energy on the competencies and resources required for network participation and those that contribute to the creation and capture of value with OSS. The study has been insightful in other respects also. We also found that establishing cooperative linkages in a network often begin in a representational capacity.

However,

depending on the strength of the ties in the network and how well partners get along with each other, these linkages tend to become more personal over time. Thus, more attention should be given to the use of informal mechanisms as a way of developing effective value networks.


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Acknowledgements This work is supported in part by Science Foundation Ireland grant 03/CE2/1303_1 to Lero – the Irish Software Engineering Research Centre.


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Working Papers on Information Systems | ISSN 1535-6078 Editors: Michel Avital, University of Amsterdam Kevin Crowston, Syracuse University Advisory Board:

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