Platt Perspective on Business and Technology

Considering a cost and benefits analysis of innovation 6: determining what to retain in-house and what to outsource to supply chain and other business to business partners 3

Posted in macroeconomics by Timothy Platt on June 12, 2014

This is my sixth installment in a series on the costs and benefits of innovation as it is tracked and measured through a complete innovation manufacturing cycle – as that is measured and understood from both the supply and demand sides (see Macroeconomics and Business, postings 162 and loosely following for Parts 1-5.)

I primarily focused in Part 5 of this series on innovations that would improve a supply chain’s competitive effectiveness, and benefit its participating businesses, that are developed essentially entirely within single participating businesses, and that are then shared according to the terms of contractual agreements. I then concluded that series installment by raising the topic of innovations that are collaboratively developed and fine-tuned for more effective collaborative use by more than one partner business in a supply chain system. My goal for this posting is to more fully explore that innovation development scenario. And I begin that here by drawing a crucial distinction between proprietary and open source.

• When a single business develops an innovation entirely in-house and at its own overall expense,
• And when this innovation is developed with a goal of creating new value enhancing business efficiency and competitive advantage,
• Most of the time and under most circumstances that business would seek to develop secure ownership over this new development, and over its access and use by other businesses.
• This may mean licensing agreements or any of a variety of other terms of permitted outside use but the primary goal here would be to maintain overall ownership of this innovation, as a proprietary holding.
• When a group of businesses coordinately develop an innovation and bring it to sharable, value-creating effectiveness, they might also collectively pursue a more proprietary ownership approach where for example any additional businesses that would seek to use this too, would have to in effect buy their way into the group. That, and once again simply as one possible example scenario, might mean new user businesses contractually agreeing to certain types of non-compete terms of use with the innovation developing businesses that own and license it. Though to highlight the complexities of this type of agreement, non-compete agreements per se can easily run into conflict with antitrust law (also called competition law) and in many jurisdictions. So any such contractual agreement would have to be very narrowly written, to only affect competitive activity as it relates to use of that specific innovation – and even then such an agreement might be readily challengeable in court.
• Alternatively, businesses can collaboratively develop shared innovation more as an open source endeavor. And in this case, innovations so publically proffered are likely to primarily arise as open standards protocols and mechanisms that would facilitate business to business interactions per se.

When proprietary is the primary term of relevance here, the goal is to limit and control access and innovation diffusion, though this can at most simply mean slowing down the diffusion of basic underlying innovative concepts that form the framework for the specific new development. As soon as a sharable new innovation becomes publically known, and certainly for proprietarily held ones, competitors can be expected to begin actively developing alternative competing innovative solutions to match it. Here, knowing that a type of innovation is possible and what it can do, can constitute the biggest and most important step in its diffusing out in the form of new and competing analogous innovation developments.

When open source is the primary term of relevance here, the primary goal is one of achieving wider acceptance and use, and certainly where the goal is in creating a new open standard for business to business connectivity and collaboration. There, the goal is to get every business to use it and the incentive is that this means essentially any and every potential business to business collaborative partner that the developers would consider working with would be that much more ready to quickly, effectively collaborate with, making the most effective use of even rapidly emerging and short term collaborative opportunities.

I am going to turn in my next series installment to consider licensing agreements, there more explicitly doing so in supply side and demand side terms. Meanwhile, you can find this and related postings at Macroeconomics and Business.

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