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Open Innovation in a Cosmetic Firm: Developing Capabilities in Managing Communities

Open Innovation in a Cosmetic Firm: Developing Capabilities in Managing Communities

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Open Innovation in a Cosmetic Firm:Developing Capabilities in Managing Communities
Ana Flávia Portilho Ferro
Department of Science and Technology PolicyUniversity of Campinas – Brazilanaferro@ige.unicamp.br
Open Innovation is a new concept regarding interorganizational collaboration. This newapproach preconizes the achievement of competitive advantages by searching external sourcesof innovation as well as external applications for internal technologies. However, we arguethat implementing a strategy based on open innovation requires the development of specificcapabilities in managing communities. Thus, this article aims at understanding how a firmarranges itself organisationally in order to develop these capabilities. As we are exploring newinsights about open innovation, we opted for a case study as methodological approach. Bydescribing and analysing the practical experience of Natura – a Brazilian cosmetic company -in implementing open innovation, we could identify why and when these managerialcapabilities are required and how they are developed and inserted in the company’s routines,by mobilization of the firm’s dynamic capabilities. We could observe that the institutionalvariety between communities interferes in access to knowledge, on contracts and projectsarchitectures, on priorities, targets and guidelines, among other aspects; and that thedevelopment of capabilities in managing this diversity relies on seeing these communities asnew innovation resources which require new managerial arrangements.
According to the Schumpeterian economy theory, technical change is the main driving forceof the capitalist system. It is capable of levering productive systems as well as generating neweconomic cycles. Still according to Schumpeter (1934), innovation is the crucial source of effective competition, economic development and social change. Thus, competition originatedby a new or significantly improved product, process or service is much more devastating thana non innovative competition (Freeman, 2003; Metcalfe, 1998).Consequently, innovation has been playing an important role in competitive strategies studiesand the search and pursuit for innovation has become a deliberative and systematic process,
 2an “organizational competence which can be turned into a continuous and replicatingpractice” (Robert, 1995).Among the existing literature about strategy and innovation management, we give specialattention to the Open Innovation approach, proposed by Henry Chesbrough in 2003.According to this approach, firms can no longer count on their own R&D competences andmust look for external sources of innovation. In addition, Chesbrough highlights theenormous potential of out-licensing technologies which are developed but nevercommercialized due to incompatibilities with the firm’s business model
. The concept of collaborating in order to innovate is not at all a new one and has been deeplydiscussed by some of the main schools of thought dedicated to organizations and innovationstudies, such as the evolutionary theory, the innovation systems approach and strategicnetworks studies. But we believe Chesbrough brings an important contribution when hetranslates the idea of collaboration to business models, process and tools, making it moretangible to managers and entrepreneurs.However, to be successful in implementing the practices proposed by Chesbrough, a firmmust have specific managerial and organizational capabilities. An open innovation-orientedstrategy demands a cultural shift, the mobilization of strategic professionals, theimplementation of new process and tools - including IT tools -, the identification of potentialinnovation sources and guidelines to manage each one of these sources, among otherorganizational changes. And so far the literature about Open Innovation has not explored theprocess of constructing and developing these capabilities.In this paper, we draw special attention to the development of managerial competencesrequired to manage a wide range of innovation sources. We believe that the sustainability of an open innovation approach relies on the expertise in
managing communities
. Thisexpertise must be a core competence of the firm and may be regarded as an innovative asset(Christensen, 1995) necessary to extract value from strategic networks and maintain theirstability (Dhanaraj & Parkhe, 2006).What we argue is that, before implementing an open innovation strategy, a firm must dedicateefforts to developing these capabilities. This process involves seeing which externalcommunities may be innovation resources, capable of bringing competitive advantages to thefirm, according to the resource-based view (RBV) (Rumelt, 1984; Teece, 1984; Wemerfelt,1984). In sequence, the firm must mobilize its dynamic capabilities (Teece
et al
., 1997) in
 3order to develop the competences required to create and capture value (Chesbrough, 2006)from each one of these communities, considering they belong to different institutional orders. Then, the firm will be able to establish relational routines with each one of these communitiesand also, if necessary, create tools to facilitate the access to them. That is to say, theimplementation of open innovation depends on identifying new innovation resources (RBV)as well as on dynamic capabilities mobilization to create process and routines to access andcreate value from these sources. To illustrate our argument, we present the case of Natura, a Brazilian cosmetic companywhich have been implementing an open-oriented R&D strategy since 2006. The closeobservation during 18 months of the R&D department routines as well as the efforts taken tomake the research processes more opened permitted us to have some insights about gaps inthe open innovation approach which need to be filled, for what we use the contribution of theRBV and the dynamic capabilities approach. The article is structured in six sections. The first section gives an overview of the literatureabout open innovation, the resource-based view of the firm, and dynamic capabilities. In thesecond one, we rapidly present and justify the methodological approach. In the third sectionwe describe the case of Natura. In the fourth one, we present the discussion, where we try todevelop our argument using illustrative elements from the case. Finally, we conclude thearticle and list the bibliographic references.
Conceptual Background
1.1. Open Innovation
Proposed by Henry Chesbrough (2003), the concept of Open Innovation suggests that firmsmust pursuit competitive advantages by searching external sources of innovation as well asexternal applications for internal technologies - either by new business or out-licensing.According to Chesbrough, the advantages that firms gain from internal R&D expenditurehave declined in the last years. He points some causes of this phenomenon, calling themerosion factors. The erosion in the strategic advantage of internal R&D is related to thegrowing mobility of highly experienced and skilled people, the increasing availability of venture capital, and the shortening of products life cycle. All these factors make it difficult forfirms to appropriate and control their R&D investments.

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