FINAL Master Thesis Thesis Thesis

DECOMPOSING INNOVATIVE PRODUCTS AND CHOOSING THE
APPROPRIATE GOVERNANCE FORM FOR PROBLEM SOLVING

A STUDY OF THE PRODUCT DEVELOPMENT PROCESS IN SMALL MED TECH COMPANIES
STUDENT : SUSANNE KOLLE

ECONOMICS AND BUSINESS ADMINISTRATION , INNOVATION MANAGEMENT
SUPERVISOR: CARSTEN BERGENHOLTZ

DEPARTMENT OF BUSINESS ADMINISTRATION , SCHOOL OF BUSINESS AND SOCIAL SCIENCES, AARHUS UNIVERSITY
DECEMBER 2013
NUMBER OF CHARACTERS (NO SPACES ): 131.267

EXECUTIVE SUMMARY
This thesis examines the most recent developments in the area of open innovation. Chesbrough (2003),
who coined the term open innovation, describes it as companies opening up their innovation process to
ideas from external sources, as well as allowing ideas to go to market via external paths. Open innovation
thus allows ideas to develop in the most favourable environment and extends companies’ business models
to create and capture additional value through ideas exiting the company before they have reached the
market.
Lakhani et al. (2013) and Felin and Zenger (2013) explores a new perspective on open innovation by
suggesting that products or the product development process can be broken down into smaller problems,
for which a decision should be made about where on the open to closed innovation continuum it should be
placed. While open innovation has become increasingly popular, Lakhani et al. (2013) encourage a change
of discourse from open versus closed, to that of adopting complex boundaries embracing open as well as
closed innovation within organisations, where the decisions on whether to include external sources of
knowledge are made on individual problem level.
Felin and Zenger (2013) have in their conceptual article laid out a framework for finding the appropriate
governance choice for these decomposed products or processes by looking at bundles of supporting
instruments, namely communication pattern, incentives and intellectual property rights. Their conceptual
article lays out guidelines for six different governance choices; two forms of closed innovation - authority-
based and consensus-based hierarchies - and four forms of open innovation – markets, contract based
relation-ships; partners, alliances and corporate venture capital; contests, tournaments and innovation
platforms; and users and user communities.
Felin and Zenger (2013) encourage future research to explore their framework and deepen the
understanding of the dynamics when adopting a complex barriers approach. They suggest that some
governance choices may be more easily adopted for some companies, while other governance choices are
more accessible for other organisations. Lastly, they state that the ability to decompose problems and the
hiddenness of locus of knowledge may also influence governance choices made organisations.
This phenomenon of combining open and closed innovation, as well as the governance hereof is explored in
this thesis. The phenomenon is examined in small med tech companies, and it was sought to explain how
these companies make decisions on, when to exploit internal knowledge, and when to engage external
knowledge. The problem investigated in thesis is:
How do small companies divide their innovative products or product development

process into smaller parts, and decide whether they have the competencies to
deal with them internally, or need to involve external expertise, in order to place
them on the open to closed innovation continuum and choose the appropriate
governance form for solving them?
There is thus two main focuses; to investigate how companies relate to dividing their product development
into smaller parts, and to understand how companies then work with defining these problems and make a
choice of solving them internally or bringing in external expertise, which calls for making a choice of
governance form. This will be investigated in a setting delimited to the health care sector, which is an
Decomposing innovative products and choosing the appropriate governance form for problem solving |
important stronghold for Denmark, amounting for a substantial part of the Danish export - 12% of the total
export in 2011. Rather than the health care sector as a whole, which is very diverse, the medical equipment
– or med tech – sector has been singled out to be the industry of interest for this study.
While Lakhani et al. (2013) have focused on large multinational companies, the author investigates the
conceptual framework presented by Felin and Zenger in small med tech companies, to examine how
mechanisms for governance choice in a problem based view are tackled by small organisations. This was
examined through a qualitative multiple case study, interviewing senior level staff in eight med tech
companies.
With regards to the aim of investigating how small companies deal with problem decomposability of their
innovative products, the study showed that the companies did try to structure their problems thus making
them decomposable, and that when possible the products are decomposed into simpler problems that
then can be dealt with separately. Therefore, it is found reasonable to move in a direction of changing the
discourse when discussing open innovation, from open versus closed organisations to problems solved
using complex boundaries and a mix of governance choices, and thereby placing their problems differently
on the open to closed continuum as proposed by Lakhani et al. (2013).
Additionally, a pattern emerged showing that products initiated by market pull had a higher degree of
decomposability and thus a lower degree of complexity than the products arising from a technology push.
The study, however, did not uncover the underlying cause behind this trend, which makes it interesting to
see whether it would be possible to find a such cause and confirm the finding in future research.
Secondly, the study sought to uncover how the companies dealt with making governance choices and
deciding whether the problem should be solved internally or externally. The study found that to reach a
governance choice, the case companies went through a more or less implicit process. First, the companies
work with structuring or assessing the complexity and decomposability of the problems that need solving in
their product development process, then they evaluate whether the needed knowledge and competencies
are held internally, and lastly they put effort into locating the knowledge internally as well as externally.
The findings of the study confirm most of the theory laid out by Felin and Zenger (2013) and makes a few
additions to the bundles of supporting instruments. The study uncovered that contractual governed
relationships were supported with ongoing communication, just like when entering into partnerships,
alliances and corporate venture capital agreements, rather than with limited communication and
knowledge sharing as proposed by Felin and Zenger (2013). For companies that entered into partnering
agreements the study also found that incentives supporting the process were complemented by incentives
relating to future sales and thus a lot longer term than just the development process.
Further, this study added the dimension of companies without product protection in the form of patents on
their products, and thereby investigating the governance choices without intellectual property rights being
a supportive instrument. The findings revealed that removing this instrument the governance choices were
still following the same pattern as laid out by Felin and Zenger (2013).
An interesting finding with regards to governance choice was though the fact that none of the companies
studied used contests, tournaments and innovation platforms or user communities, all of which are often
supported by digital platforms. This was surprising as the increasing digitalisation had been predicted to be
an assisting factor in the increased use of open innovation, and particularly so for small and medium sized
companies. The proposition made by Felin and Zenger (2013) that some forms of governance may be more
accessible or familiar to certain organizations, which may lead to certain governance choices, was thus
proved in this study, as at least some governance choices did not seem accessible to the small med tech
companies, why the companies did not use them at all.
DECOMPOSING INNOVATIVE PRODUCTS AND CHOOSING THE
APPROPRIATE GOVERNANCE FORM FOR PROBLEM SOLVING
A STUDY OF THE PRODUCT DEVELOPMENT PROCESS IN SMALL MED TECH COMPANIES
TABLE OF CONTENTS
1 Introduction ................................................................................................................................. 4
1.1 Delimitation ........................................................................................................................... 5
2 Literature review .......................................................................................................................... 7
2.1 Open innovation .................................................................................................................... 8
2.2 Open innovation in a new perspective ............................................................................... 12
2.3 Problem complexity ............................................................................................................ 14
2.4 Locus of problem solving knowledge .................................................................................. 15
2.5 Governance choices ............................................................................................................ 17
2.5.1 Intellectual property rights .......................................................................................... 18
2.5.2 Incentives ..................................................................................................................... 19
2.5.3 Communication ............................................................................................................ 20
3 Methodology .............................................................................................................................. 23
3.1 Case study............................................................................................................................ 25
3.2 Sampling .............................................................................................................................. 25
3.3 Data collection methods ..................................................................................................... 30
3.4 Interviews ............................................................................................................................ 31
3.4.1 The interview guide ..................................................................................................... 33
3.4.2 The technical aspects of interviewing.......................................................................... 33
3.5 Criteria of qualitative research............................................................................................ 34
3.6 Limitations of the study Limitations of methodology applied in the study ........................ 34
Decomposing innovative products and choosing the appropriate governance form for problem solving | 1
4 Qualitative analysis .................................................................................................................... 35
4.1 findings ................................................................................................................................ 36
4.1.1 The problem structure’s influence on governance choice .......................................... 37
4.1.2 Locus of knowledge...................................................................................................... 38
4.1.3 Using the supportive instruments ............................................................................... 39
4.1.4 Intellectual property rights as a facilitator for outbound innovation and investment41
4.1.5 Small companies .......................................................................................................... 42
5 Discussion................................................................................................................................... 44
6 Conclusion .................................................................................................................................. 51
7 Bibliography ............................................................................................................................... 53
Appendix I – Cluster organisations .................................................................................................... 56
Appendix II – Case companies ........................................................................................................... 57
Appendix III – Interview guide - Topic list .......................................................................................... 58
Appendix IV – Hierarchly ordered codes ........................................................................................... 59
TABLE OF CONTENTS – APPENDICES ON CD
Interview with Mads Hemdorff Petersen – Health Equipment DenmarkError! Bookmark not
defined.
Interview with Peter T. Kenney Hansen – Rhinix .................................. Error! Bookmark not defined.
Interview with Anders Nejsum – Visikon .............................................. Error! Bookmark not defined.
Interview with Anders Kryger – Chromaviso ........................................ Error! Bookmark not defined.
Interview with Mogens Ravn – Nordisk Røntgen Teknik ...................... Error! Bookmark not defined.
Interview with Charlotte Prang – Playscapes ....................................... Error! Bookmark not defined.
Interview with Eske W. Petersen – Medichanical Engineering ............ Error! Bookmark not defined.
Interview with Finn Jensen – Therm Aid............................................... Error! Bookmark not defined.
1 INTRODUCTION
In 2003 Chesbrough introduced the term open innovation, which describes the phenomenon of
companies at times opening up their innovation process to include external parties. In short, open
innovation, describes an innovation process where ideas can enter from external sources, as well
as exit the process prematurely, and go to market via external parties. According to Chesbrough
(2003), an open innovation approach not only allows ideas to develop in the most favourable
environment it also extends companies’ business models to create and capture additional value
through, for instance, the premature exits.
Following the focus on open innovation, companies increasingly involve users, customers,
suppliers, external research organisations etc. in the innovation process (e.g. Chesbrough, 2003;
Chesbrough & Crowther, 2006; Chesbrough et al., 2006; van de Vrande et al., 2009; Gulati et al.,
2012). Recent literature assesses the development in the past decade where open innovation has
been an increasingly hot topic (Dahlander & Gann, 2010). The increase in open innovation has
been driven by accelerating digitalisation which has eased the way of communicating with
external parties, and which has made tools available, that has allowed an increasing number of
participants to get involved in the innovation process (Lakhani & Panetta, 2007; Gulati et al., 2012;
Lakhani et al., 2013).
Many researchers has explored the open innovation paradigm (e.g. Chesbrough, 2003;
Chesbrough & Crowther, 2006; van de Vrande et al., 2009; Dahlander & Gann, 2010; Spithoven et
al., 2010; Wallin & von Krogh, 2010; Lichtenthaler, 2011; Gulati et al., 2012), however, a new
perspective is surfacing. Lakhani et al. (2013) introduce a new perspective on the open verses
closed innovation discussion by proposing that companies should not make a decision about
openness with regard to the entire company or portfolio, but rather that products or product
portfolios can be broken down into smaller problems, for which a decision should be made about
where on the open to closed innovation continuum it should be placed. This means that
companies should consider operating with a complex boundary approach in which they practice
both open and closed innovation to optimise the solution of individual problems. Further, Felin
and Zenger (2013) has also adapted the innovation problem as unit of analysis, and have in their
conceptual article laid out a framework for finding the appropriate governance choice by looking
at bundles of supporting instruments, namely communication pattern, incentives and intellectual
property rights. The aim with this framework is to support managers’ decisions-making with
regards to which governance forms to utilise for the increasingly complex boundaries with varying
levels of open and closed innovation in the same company.
Felin and Zenger (2013) encourage future research to explore their framework and to seek a
better understanding of the dynamics of the complex barriers. They state that “A natural, future
direction, for example, is to study how some forms of governance may be more accessible or
familiar to certain organizations and thus lead to differing governance choices” (Felin & Zenger,
2013, p. 10). They further add that experience with particular governance forms or ability to
decompose problems may influence the boundary decisions adopted by organisations (Felin &
Zenger, 2013).
This phenomenon of combining open and closed innovation, as well as the governance hereof will
be explored in this thesis. As the Felin and Zenger (2013) article is conceptual and the conclusions
made by (Lakhani et al., 2013) are based on observations of large multinationals, it raises the
question of whether this is valid for all sizes of companies. Smaller companies may only have a
limited portfolio or even only a single product. Additionally, smaller companies often work with
very constrained resources. Therefore, this thesis will investigate whether small companies are
able to decompose tasks mainly focusing on the product development process, and engage in
opposing innovation logics simultaneously. It will also be sought to explain how these companies
decide when to exploit internal knowledge and when to engage external knowledge.
It could be speculated that small companies with limited portfolios or single product focuses may
have difficulties decomposing and placing tasks on the open to closed continuum, as they have
limited experience with this activity. However, alternatively smaller companies with a limited
product portfolio and a limited number of staff may find it easier to assess core competencies and
take stock of their internal knowledge, which would result in them finding it easier to divide their
activities and choose appropriate governance form on the open to closed continuum.
The problem investigated in thesis will therefore be:

How do small companies divide their innovative products or product
development process into smaller parts, and decide whether they have the
competencies to deal with them internally, or need to involve external
expertise, in order to place them on the open to closed innovation
continuum and choose the appropriate governance form for solving them?
The above problem statement leads to having a two-parted focus. First, to investigate how
companies relate to dividing their product development into smaller parts, and secondly, how
companies then work with defining these problems and make a choice of solving them internally
or bringing in external expertise, which calls for making a choice of governance form.
1.1 DELIMITATION
The thesis will examine the problem formulated above with its main focus on exploring the
findings of Lakhani et al. (2013) and the conceptualised ideas of Felin and Zenger (2013) in a
different context. The focus of the thesis will be innovative products and the product development
process. The above stated problem will be investigated in a setting delimited to the health care
sector. This sector is an important stronghold in Denmark and makes up a substantial part of the
Danish export with 12% of the export in 2011 falling into the categories of pharmaceuticals,
medical equipment and devices, and assistive technology1. Health care is therefore a very
important area of business for Denmark and therefore highly relevant to investigate to highlight
issues that can influence the future competitive advantage of this industry.
Drilling further down within the health care sector, the medical equipment – or med tech – sector
has been singled out due to it having a relative short horizon of development compared to
pharmaceuticals. The shorter development time is to some extent due to shorter regulatory
processes which can vary from relatively short time for technical products that are not used
internally in the human body, to somewhat longer, when clinical trials are needed. However,
clinical trials for med tech devices are not as demanding as for pharmaceutical products.
While Lakhani et al. (2013) have focused on large multinational companies, the author wish to
investigate the conceptual framework presented by Felin and Zenger in small med tech companies
to examine how mechanisms for governance choice in a problem based view are tackled by small
companies.
The med tech sector has been approached through med tech cluster organisations. The companies
interviewed for this thesis are mainly from the med tech cluster in the Central Denmark Region
and have been approached through the cluster organisation Med Tech Innovation Center. A
contrast sample has been added from the med tech cluster in the North Denmark Region through
the med tech network BioMed Community. Both cluster organisations are recognised by the
Danish Ministry of Science, Innovation and Higher Education2 and a short presentation of the
organisations and region can be found in appendix I.
First the relevant literature in the areas of innovation, open innovation, knowledge transfer, locus
of knowledge and complexity of problems and the overlaps hereof will be reviewed to create a
platform for discussing and examining the new perspective on open innovation proposed by
Lakhani et al. (2013) and Felin and Zenger (2013) playing an important role in this thesis. Next the
methodology of the study will be outlined, which is followed up by the findings of the study. The
thesis is concluded with a discussion of the findings and rounded off with concluding on the
problem formulation stated above.
1
http://medwatch.dk/Medico___Rehab/article5122456.ece
2
http://www.masterpiece.dk/UploadetFiles/11133/25/Temaopdelt_klynge-_og_netv_rksbeskrivelser_august_
2013.pdf
2 LITERATURE REVIEW
When investigating how companies work with innovative products and processes it is important to
define exactly what is meant by innovative, as this is a term with multiple possible interpretations.
In the area of innovation many recent definitions refer back to Schumpeter’s texts from the early
20th century (e.g. van de Ven, 1986). In his texts, Schumpeter describes the entrepreneur, as a
type of person that does not just conceive ideas of new combinations, which is the way
Schumpeter characterises innovations, but also act and brings them to the market (Schumpeter,
1911 & 1934 in Becker et al., 2011). Schumpeter also distinguishes between invention and
innovation. He states that “As long as they are not carried into practise, inventions are
economically irrelevant. … Besides, the innovations which it is the function of entrepreneurs to
carry out need not necessarily be any inventions at all.” (Schumpeter, 1934 in Becker et al., 2011,
p. 67).
In the original 1911 version of this text Schumpeter writes “We therefore always need to make a
fundamental distinction between the existing stock of technical knowledge and the knowledge that
is in fact used in production. Both do not fully overlap. The whole knowledge of a time is not put to
use in the economy. … The function of pushing through new combinations and of enlarging our
knowledge, the function of the entrepreneur and the function of the inventor are completely
different things. … As mentioned already, for the processes of the economy, only the entrepreneur
is of interest. Inventions play merely a secondary role – they only increase the number of
possibilities, which is already infinite.” (Schumpeter, 1911 in Becker et a.l, 2011, p. 134).
Schumpeter further points out that successful innovation results in profit (Schumpeter, 1939 in
Becker et al., 2011, p. 303).
While Schumpeter defined five specific types of innovation3 it is also clear from the above
reasoning that an innovation can be seen as a product or service brought to market, what
Schumpeter calls a new combination. However, it is also evident that innovation is also a process –
the act of bringing the new combinations through production, marketing them and selling them to
make a profit.
Very much like Schumpeter, van de Ven (1986) states that innovation can be both a process and
an outcome of such a process. van de Ven (1986) defines the process of innovation as “the
development and implementation of new ideas by people who over the time engage in
transactions with others within an institutional context” (van de Ven, 1986, p. 591). Innovation as
an outcome is then defined as a “new idea, which may be a recombination of old ideas, a scheme
that challenges the present order, a formula or a unique approach which is perceived as new by the
individuals involved” (van de Ven, 1986, p. 591).
3
Product innovation, process innovation, entering new markets, discovering new supply and raw materials and
organisational innovation
Again, similar to the Schumpeterian definition, Wallin and von Krogh (2010) defines innovation as
“a process that covers the creation and use of knowledge for the development and introduction of
something new and useful” (Wallin & von Krogh, 2010, p. 1). They also look at innovation as a
process of bringing about new combinations, but rather than talking about value they talk about
usefulness. However, this might be two sides of the same coin as it is hard to imagine that non-
useful innovations could provide any value. Usefulness is though a subjective term which open up
for different interpretations of value, rather than strictly speaking of economic value, which
Schumpeter (1911 & 1934) refers to. van de Ven (1986) also suggest that innovation must be
useful, and argues that this goes hand in hand with Schumpeter (1911 & 1934) criterium of
economic value creation. The reasoning behind this is that new ideas, that does not solve any
problem, or make any profit, are considered to be mistakes rather than innovations. It is obviously
most preferable to invest efforts in the latter, innovations, over the former, mistakes, but it may
take time from an idea being conceived to it being possible to identify in which category it will end
up (van de Ven 1986). Thus the discourse surrounding the term innovation is often positive.
An important contribution by Wallin and von Krogh (2010) is though the addition of the creation
and use of knowledge into the definition, which to a higher degree open up for external input to
the process. This highlights one point where Schumpeter differs considerably from the current
literature. Schumpeter (1911 & 1934) argues that while consumer demands must of course be
considered, since the consumers are the ones who must in the end buy the product, innovation is
initiated by the producers, who then educate the consumers about why they should buy this new
product or service. This refers to a mostly internally focused process of developing and marketing
products. In this thesis the Schumpeterian idea of innovations being new combinations taken
through a process which ultimately is aimed at creating value in a market is adopted. Though the
more current views of the importance of knowledge and possibility for this not being an entirely
internal process is embraced. When innovative products are mentioned in the problem
formulation these are thus new combinations aimed for being marketed and creating economic as
well as other forms of value.
2.1 OPEN INNOVATION

In some instances it may though be more effective for the innovation process when internal
competencies are enhanced through complementing externally acquired competencies. When
involving external parties in innovation efforts, this is classified as open innovation, a term coined
in 2003 by Chesbrough (2003). The open innovation approach was formulated as an antithesis to
the at that time traditional view on research and development as being internal matters, where
companies were dependent on internal capabilities to a much higher extent and would be hesitant
to involve external entities. In the open innovation paradigm, however, external partners are also
a part of the innovation strategy, as organisations actively look outside their own organisation for
inspiration, ideas and technologies. Therefore, organisations practising open innovation are
focusing not only on internal development and marketing capabilities but also on including
external input in the process as well as external
organisations can be alternative paths to the
market as illustrated in Figure 1 (Chesbrough
2003; Chesbrough & Crowther, 2006).
While Chesbrough introduced the term open

innovation in 2003, his 2006 definition is the
preferred definition of open innovation4 and
defines open innovation as “the use of purposive
inflows and outflows of knowledge to accelerate
internal innovation, and expand the markets for
external use of innovation, respectively. Open
innovation is a paradigm that assumes that firms
can and should use external ideas as well as
internal ideas, and internal and external paths to FIGURE 1 - THE KNOWLEDGE LANDSCAPE IN THE OPEN INNOVATION
PARADIGM – (CHESBROUGH, 2003, P. 44)
market, as they look to advance their technology”
(Chesbrough et al., 2006, p. 1).
The phenomenon of open innovation, however, is not new. The phenomenon had been noted to
be on the increasing since the 1980’s as researchers were commenting on the movement they
were observing amongst businesses, noting that companies were starting to experience a greater
need for being able to acquire knowledge from external sources to complement their internally
developed technology portfolios (Spithoven et al., 2010; Gulati et al., 2012). Aylen (2010) even
reports on open innovation in the 1920’s in the steel mill development and several other authors
agree that open innovation as such is not a new concept (e.g. Spithoven et al., 2010; Dahlander &
Gann, 2010; Aylen, 2010). There has though been a rise in open innovation and it is a lot more
common today than it has been earlier (e.g. Chesbrough, 2003; Chesbrough & Crowther, 2006;
Chesbrough et al., 2006; van de Vrande et al., 2009; Gulati et al., 2012).
This trend of increasingly recognising a need for acquiring knowledge externally is aligned with the
fact that Wolpert (2002) a year prior to Chesbrough’s book on the topic of open innovation (2003),
predicted that the greatest growth opportunities in the increasingly complex global world were to
involve cooperation between multiple companies rather than single entities working on their own.
Wolpert (2002) further argued that “successful innovation requires … the ability to harvest ideas
and expertise from a wide array of sources. For a company, that means bringing in insights and
know-how not just from outside parties but from other businesses” (Wolpert, 2002, p. 78).
Chesbrough and Crowther in 2006 listed a number of frequent reasons for engaging in open
innovation which included increased product margins, increased speed to market as well as it
being a way of keeping in touch with what is going on in the industry and thereby spotting
4
http://www.openinnovation.net/about-2/open-innovation-definition/
potential disruptive technologies. They also found that companies embracing this approach do so
because it is important to be able to benefit from technologies practised outside the company to
create profit and growth of current as well as potential new business. Wallin and von Krogh
(2010), adds to the above by arguing that open innovation can help companies reduce their costs
for product and process development, or improvements, and that it also opens up for
commercialising technologies through external partners, which would otherwise have been
wasted.
Another key argument for open innovation is known as Joy’s law, which refers to the founder of
Sun Microsystems, Bill Joy, stating that “No matter who you are, most of the smartest people work
for someone else” (cited in Lakhani & Panetta, 2007, p. 97). This is a simple argument, but it
conveys the powerful message that even the largest companies may sometimes need expertise
that cannot be found within the organisational boundaries. Lichtenthaler (2011) also state that
much of the prior research points to it being difficult to generate all knowledge needed internally
in an organisation. Further, a high labour mobility and more wide distribution of knowledge drive
companies towards an increased cooperation with external sources (van de Vrande, 2009).
Therefore, organisations - big or small, public or private, delivering products or services - look to
external sources of knowledge to extend their current knowledge and thereby expanding their
innovation process.
However, when deploying an open innovation approach more is not necessarily merrier. Laursen
and Salter (2006) investigated the number of external partner types cooperated with, as well as
the extent or depth of the cooperation compared to innovation performance. The proxies they use
for innovative performance are percentage of turnover from products new to the world, new to
the company and significantly improved products. They found that if including more than 11 of
their predefined source types (search width), negative or at least decreasing returns can be
expected. Further, working extensively (search depth) with more than three sources may also
result in decreasing returns. Additionally, Laursen and Salter (2006) found that a higher degree of
radical innovation made search breadth less effective but search depth more effective. Therefore,
it is important when seeking out external partners for innovative products or processes that
companies focus on finding the right ones, rather than including all possible sources.
Knudsen and Mortensen (2011) found that new product development was neither faster nor
cheaper when including external partners in the process. The quality, however, appeared to be
higher, but not enough to be significant. These efficiency measures - costs of new product
development and time to market - tell us something about the fact that efficiency does not seem
to be increased when working with external partners, however, it does not tell us about the
effectiveness of including external partners, such as, for instance, whether the knowledge transfer
and learning has increased. Neither the results from the study made by Laursen and Salter (2006),
nor from the Knudsen and Mortensen (2011) study tells us much about the effectiveness of open
innovation. However, both studies point out that there may not be a higher efficiency and that
companies can in fact be too open and over-search.
While open innovation may often be presented with great promises it is, however, no easy route
to success. It can be difficult to manage open innovation processes, as important aspects differ
from traditional internal innovation processes. First of all external partners must agree to be a part
of the innovation process and therefore managers do not have the same amount of control as
when dealing with internal parties. Also, for companies who do not have much experience with
including external parties in their innovation process there is a risk of relatively high failure rates
(Lakhani & Panetta, 2007). Further, it can be difficult to actually appropriate the results reached in
open innovation cooperation (Dahlander & Gann, 2010). Hence, it is critical to thoroughly consider
advantages as well as disadvantages when engaging in open innovation.
In much of the open innovation literature the focus is on capturing the benefits of including
external knowledge in the innovation process (e.g. Laursen & Salter, 2006; Spithoven et al., 2010;
Knudsen & Mortensen, 2011; Gulati et al., 2012). This is referred to as inbound open innovation,
whereas using external paths for ideas to go to the market is referred to as outbound open
innovation (Dahlander & Gann, 2010). This pattern is not only found in the literature, but
Chesbrough & Crowther (2006) also found in their study of companies in mature and / or asset
intensive industries that only few companies had outbound open innovation efforts. Chesbrough
and Crowther (2006), though, believed that this was a function of the studied group of companies,
as they argue that “every inbound technology effort by one organization generates a reciprocal
outbound effort from some other organization” (Chesbrough & Crowther, 2006, p. 332-333).
Whether the relationship between inbound and outbound innovation is so straight forward
relationship as described, could though be questioned. Two important arguments make the
author of this thesis hesitant in accepting a such one to one relationship. First, Universities role in
diffusing knowledge would lead to the assumption of universities practising more outbound open
innovation than inbound open innovation. Secondly, Alexy et al. (2009), state that “99% of patent-
licensing revenue in the United States is generated by companies that own 40% of all U.S. patents;
that is, the remaining 60% of the patent holders receive just 1% of the revenue” (Alexy et al., 2009,
72). Using the monetary value of patent licencing agreements as an indicator, could point towards
there not being a straight forward relationship in which one company’s inbound innovation effort
creates a reciprocal outbound effort by another company, but that one company’s outbound
innovation efforts may serve more than one company’s inbound need. Concluding on the above, it
looks as there might not be an equal use of inbound and outbound open innovation efforts by
companies. The definition of open innovation, however, mentions the possibility of both purposive
inflows as well as outflows of knowledge (Chesbrough et al., 2006).
2.2 OPEN INNOVATION IN A NEW PERSPECTIVE
Lakhani et al. (2013) encourage moving forward the debate on from an open vs. closed discourse
to making such decisions on a problem based level. This means that companies should consider
operating with a complex boundary approach in which they practice both open and closed
innovation to optimise the solution of individual problems in their innovative products or
processes. Lakhani et al. (2013) and Felin and Zenger (2013) thus suggest that products and
processes can be broken down into smaller problems, for which decisions must be made on where
it should be placed on the open to closed innovation continuum. This could mean that it is more
challenging for organisations opening up to external parties as they, looking at open innovation
this way, have to make a lot more boundary decisions. However, it also allows for a lot more
targeted boundary decisions, which may make it easier. Lakhani et al. (2013) suggest two driving
factors for this approach “the degree to which critical tasks can be decomposed and the extent to
which problem solving knowledge for these tasks is distributed” (Lakhani et al., 2013, p. 357).
The logic of transaction costs, when seeking external expertise, has been leveraged by the
increased digitalisation, and this allows for increased task decomposition and for reaching a larger
amount of external actors due to the lowered costs of doing so (Gulati et al., 2012; Lakhani et al.,
2013). The increased digitalisation may also have been a contributing factor to more small and
medium sized companies doing open innovation as found by Gassmann et al. (2010) who state
that many of the early cases of open innovation were large multinational companies, but that
open innovation has now also been adopted by small and medium sized companies too. van de
Vrande (2009) go as far as suggesting that the open innovation model encourage the increased
participation of small and medium sized companies in the innovation scene. Especially companies
that are born global, tend to adopt open innovation and could therefore also be described as born
open (Gassmann et al. 2010).
Small and medium sized companies will most likely have fewer resources for innovation, in the
form of smaller development budgets and fewer members of staff, than large corporations,
therefore “SMEs need to heavily draw on their networks to find missing innovation resources, and
due to their smallness, they will be confronted with the boundaries of their organisations rather
sooner than later” (van de Vrande et al., 2009, p. 426). van de Vrande et al. (2009) further
emphasise external networking as an important practise for purposeful inflows of knowledge,
which is mainly aimed at building and maintaining relations to potential external sources of
knowledge.
If companies are able to strategically decompose innovative products or processes into smaller
problems or tasks this will allow them to work in a very focused manner and make boundary
decisions based on the individual problems or tasks. Knudsen and Mortensen (2011) argued that
the need for including external partners will increase the further projects are from the company’s
core competencies. This means that decomposed products or tasks, which are based on core
competencies and extensive inside knowledge, can be handled by the company itself. However,
for tasks that are not core competencies, and for which the knowledge needed in the problem-
solving process is highly distributed, the company can reach out to external actors.
An example of decomposing innovative products provided by Lakhani et al. (2013) is that of Apple,
who kept all design related decisions internally while they cooperated with for instance major chip
manufacturers about making chips for the Apple computers. Drawing a parallel to Knudsen and
Mortensen’s (2011) argument posed above, few will disagree with design of consumer goods
being a core competence of Apple. By contrast, Apple found that it could be an advantage to
include chips sourced on the market as they were performing as well if not better than internally
produced chips (Lakhani et al., 2013). This example shows how Apple worked with both open and
closed organisational boundaries simultaneously.
Lakhani et al. (2013) suggest that “If the knowledge needed to accomplish either knowledge
generation or selection is narrowly held in the firm, the associated innovation boundaries will be
fundamentally different than when knowledge is more widely distributed amongst multiple
external actors and disciplines. The more either solution generation or selection knowledge is
broadly held, the greater use of open boundaries. In contrast, to the extent that either solution or
selection knowledge is narrowly concentrated in the firm, the more internal boundaries dominate”
(Lakhani et al., 2013, p. 367). This is an argument that is hard to disagree with, considering the
increased digitalisation which has led to companies being able decompose problems and tasks to a
higher extent and to reach further too. It is also fully aligned with Knudsen and Mortensen (2011)
statement about core competence proximity mentioned above.
Choosing to adopt a complex boundary structure with open as well as closed boundaries, calls for
complex governance models (Lakhani et al., 2013). This has been further elaborated upon by Felin
and Zenger (2013) who states that “managing innovation is likely to be a complex amalgamation
of open and closed governance forms, where organizational boundaries are more permeable in
some situations—depending on the nature of the innovation problem—and less so in others” (Felin
& Zenger, 2013, p. 2). In their conceptual article they lay out guidelines for when to use different
governance choices, based on the problem characteristics and bundles of supporting instruments.
Gulati et al. (2012) suggest that knowledge distribution, decomposability of tasks, and intrinsic
motivation may affect companies’ boundary choices. Felin and Zenger (2013) expand on this and
extend the factors considered. In addition to the hiddenness of knowledge, and the complexity of
tasks, they look at bundles of instruments for guiding the selection of governance form consisting
of communication patterns for knowledge sharing, property rights for solutions and knowledge,
and incentives used to motivate participation. Certain form of governance may be more
appropriate in some situations while others may be suitable in other situations (Felin & Zenger,
2013).
Felin and Zenger (2013) discuss six different governance choices and the bundles of supporting
instruments associated with these. However, they argue that two overall factors have influence on
which mix is the optimal, namely problem complexity and the hiddenness of knowledge. Whereas
problem complexity is very similar to the ability to decompose problems investigated by Lakhani et
al. (2013), the second influencing factor differs slightly. Whereas Lakhani et al. (2013) focus on the
distribution of knowledge, and whether a significant amount of problem solving knowledge is held
internally or externally, Felin and Zenger (2013) instead focus on whether the focal organisation
know where to find the knowledge needed for solving the problem.
2.3 PROBLEM COMPLEXITY

As mentioned above the ability to decompose innovative products or processes into smaller tasks
or problems is an important factor to consider. The decomposability though depend on the
complexity of the products or process. Felin and Zenger (2013) argue that complex problems have
a high level of interdependency between the design choices and are consequently less
decomposable. This view will be adopted in the thesis and problem complexity and problem
decomposability will be considered two parallel continua with opposite directionality as depicted
below in Figure 2. Felin and Zenger (2013) suggest that when problems become more complex and
thereby less decomposable, then companies should look to governance choices that allows for
extensive knowledge sharing.
FIGURE 2 – PROBLEM COMPLEXITY VS. PROBLEM DECOMPOSABILITY
Simon (1962) also argues for the importance of being able to decompose products or tasks. This
allows for solving simpler tasks independently for then to gather these in the complex product or
process as a whole. Decomposition according to Simon (1962) leads to a more stable process with
the individual tasks representing steps of progress towards the final result.
When decomposing innovative products, Henderson and Clark (1990) emphasises that there can
be distinguished between the product as a whole – the architectural system – and the product in
its parts – the components. When developing products it is therefore important to have
knowledge about both of these elements, i.e. components knowledge about the different parts of
the product, and architectural knowledge about how these parts can be integrated into a whole
product (Henderson & Clark, 1990). If only components are changed it will not have any effect on
the overall composition of the product. If however the architecture of the product is changed, the
product as a whole will be affected, and therefore components may also need to be changed
(Henderson & Clark, 1990). Pure component innovation may therefore be considered as being
simpler, as this indicates a higher level of decomposability. If however different parts affect each
other, we are dealing with architectural innovation and a higher complexity.
Simon (1973) argues that most problems by nature are ill structured, but that they can be
structured to a varying extent when preparing to solve them. He further argues that most of the
effort in problem solving is spent on structuring problems and that only little effort goes to
actually solving them. Ill structured problems are according to Simon (1973) defined by not being
well structured. This for instance means that there initially may not be a fixed set of criteria for
testing the solution, but that constraints, and with these success criteria, will instead be developed
along the work of structuring and solving the problem. Therefore, Simon (1973) suggests that
constraints and success criteria may evolve during the process. Some may replace others and
some may be prioritised over initially outlined constraints or success criteria. This may according
to Simon (1973) be more or less conscious choices that are made during the process. Therefore,
the final solution may also be influenced by the order of the different steps in the process.
Simon outlines the process of working with ill structured problems for complex designs that calls
for external inputs as follows; “An initial stage of laying down general (and tentative)
specifications is followed by stages in which experts are called up ("evoked") to introduce new
design criteria and component designs to satisfy them. … Each small phase of the activity appears
to be quite well structured, but the overall process meets none of the criteria we set down for WSPs
[well-structured problems]” (Simon, 1973, p. 194). The search process for finding the right external
knowledge is thus complex because it is a process of finding interrelated parts of the solution,
which must be gathered and which are continuously influencing the further development of each
other as well as the final product as a whole.
2.4 LOCUS OF PROBLEM SOLVING KNOWLEDGE

Innovating, inventing and discovering activities are according to Howells (2002) dependent on
existing knowledge but often also requires new knowledge, which has to be created or acquired.
Cohen and Levinthal (1990) go so far as calling outside sources critical for the innovation process.
A non-exhaustive list of how knowledge and competencies may flow in and out of organisations
includes research partnerships, business alliances, mergers and acquisitions, venture investors,
suppliers, the organisation’s employees, or network. When using external input in the innovation
process it may therefore come from a lot of different external actors and it may therefore not be
straight forward to locate the right sources. It may be especially troublesome if the external
sources are not located in the immediate network of the person or organisation in question and
therefore partially hidden, or because it is spread over several external sources (Wolpert, 2002).
When working with an external locus of knowledge, absorptive capacity is needed for companies
to be able to transfer the knowledge from an external locus of knowledge into the organisation.
Stating that “the ability to evaluate and utilize outside knowledge is largely a function of the level
of prior related knowledge” (Cohen & Levinthal, 1990, p. 128) Cohen and Levinthal (1990) highlight
that learning is cumulative and therefore build on existing knowledge and this is what they call
absorptive capacity. The absorptive capacity is dependent upon existing knowledge, because
existing knowledge makes it easier to learn. This has to aspects: 1) the experience in learning may
ease future learning and 2) connecting new knowledge to existing knowledge makes it easier to
understand. Therefore, a diverse knowledge base will enhance the chance of connecting the new
knowledge with already existing knowledge (Cohen & Levinthal, 1990). The level of prior related
knowledge consists of basic skills, shared language as well as scientific knowledge, and is
important for recognising valuable knowledge, for internalising it and for commercially exploiting
it (Cohen & Levinthal, 1990).
While knowledge has become more accessible across organisational boundaries as well as national
boundaries in the global society, which is today connected through various information
technological tools, organisations may need prerequisite knowledge for being able to obtain new
knowledge. The knowledge needed – the absorptive capacity – may differ across types of
knowledge. Wallin and von Krogh (2010) argue that both tacit and explicit knowledge is important
for innovation.
Explicit knowledge can easily be shared and communicated due to its formal and systematic
nature, and it is therefore also globally available to a much higher extent than tacit knowledge.
Tacit knowledge is more difficult to transfer, as it is rooted in action and consists partly of skills
and partly of mental models, beliefs and perspectives that are taken for granted and are therefore
hard to articulate. The person holding the tacit knowledge simply may not be consciously aware of
the full extent of it and this, combined with the fact that it can be very hard to explain in words,
illustrations or any other codification, makes it harder to share. This leads to tacit knowledge only
being sharable through experience (Howells, 2002; Gertler, 2003). That tacit knowledge is harder
to transfer can also make it more important as this can be a way for an organisation to gain
competitive advantage in an industry. Howells (2002) do however point out that even explicit
knowledge is interpreted based on both existing explicit knowledge and existing tacit knowledge.
Therefore, most knowledge sharing does need to be accommodated by shared experiences as
well.
While the increased digitalisation may have made knowledge more accessible both Howells (2002)
and Gertler (2003) argue that geography still plays an important role when talking about tacit
knowledge, as it is local rather than global due to the difficulties in codification and therefore
difficulty of sharing over distances. Gertler (2003) further states that a common social context is
important for sharing tacit knowledge, which can be found through shared values, language or
culture. Further, Asheim and Isaksen (2002) argues that tacit knowledge involves know-how as
well as know-who. Therefore, when knowledge is embedded in local organisations, to access it,
someone must know who to approach. If organisations are not located in the immediate network
of the focal organisations, they may try to access the information through their extended network
(Asheim and Isaksen, 2002; Wolpert, 2002; Gassmann et al., 2010).
Knowledge can be transferred interactively through cooperation or more passively through

markets (Boudreau & Lakhani, 2009). When transferring knowledge across organisational
boarders, information becomes a commodity possibly with an economic value. In 1962 Arrow
described how this can be problematic. He points to the fact that information can be valuable
because it can make the possessor better off than if he or she did not have this information.
However, since information is indivisible it will lose its value if sold to a party who replicates it for
further distribution. Intellectual property rights are one tool to protect against this, although this
protection is limited to what is enforceable. Another issue with information is that it may be
valuable, but it can be very difficult for a buyer and a seller of information to agree on a price. As
Arrow expresses it “there is a fundamental paradox in the determination of demand for
information; its value for the purchaser is not known until he has the information, but then he has
in effect acquired it without cost” (Arrow, 1962, p. 615).
2.5 GOVERNANCE CHOICES

Boudreau and Lakhani discussed knowledge sharing and open innovation governance choice in the
context of collaborative communities and competitive markets (Boudreau & Lakhani, 2009). Which
of the two are better depends on the type of innovation in question, the motivation of external
parties involved in the innovation activities, and the nature of the business model. Boudreau and
Lakhani (2009) states that collaborative communities are to be preferred, if problems involve
cumulative knowledge building on past efforts, and if the preferred external partners are driven
mostly by intrinsic motivational factors. Oppositely, competitive markets are preferable if
problems are best solved by experimenting, and if external parties are mainly driven by extrinsic
motivation.
Boudreau and Lakhani (2009) further states that companies, using competitive markets to acquire
knowledge for their innovation process, will be able to obtain mix and match components which
have a high degree of substitution. Such components can also be obtained in the collaborative
communities, however, in the collaborative communities there is a tendency towards a higher
interrelation among the components. Additionally, the governance of the relationships formed will
also be different. Whereas the relationships with external partners in the competitive markets are
likely to be formal contractual relationships, the relationships with external parties in collaborative
communities are more likely to be informal and socially embedded. Finally, Boudreau and Lakhani
(2009) stresses that a strategy chosen by a company to utilise either collaborative communities or
competitive markets need not be set in stone, but should fit the problem at hand.
In the perspective of employing complex boundary structures Felin and Zenger (2013) goes further
into detail and examine several specific governance choices, open as well as closed. Felin and
Zenger (2013) discuss two specific forms of closed innovation - authority-based and consensus-
based hierarchies - and four specific forms of open innovation – markets, contract based relation-
ships; partners, alliances and corporate venture capital; contests, tournaments and innovation
platforms; and users and user communities (Felin & Zenger, 2013).
Whereas closed innovation involves only internal efforts, governing the innovation relationships
via the market or contracts often means putting a task out for tender or addressing a limited
number of selected potential partners, to present offers on the task in hand. This way, external
parties who already have a solution or are capable of generating a solution are sought, however, it
does demand from the focal firm that it knows or is able to locate the locus of knowledge (Feling &
Zenger, 2013). Like most market and contractual relationships partnerships, alliances and
corporate venture capital also invites mostly upfront identifiable external partners to participate in
the problem solving process. The collaboration with partners or alliance is though, to a higher
degree focusing on the process in addition to the results (Feling & Zenger, 2013).
Contests, tournaments, and innovation platforms often involve third party facilitation. These third
parties can help the focal organisation with broadcasting the problem to unknown loci of problem
solving knowledge often using modern information technology. Therefore, this governance choice
is also most appropriate when solving simple and decomposable problems, that may benefit from
loci of knowledge not known to the organisation in advance (Feling & Zenger, 2013).
While users and user communities may act on their own and solve challenges they have chosen
themselves, organisation may also tap into their knowledge and seek to actively engage users and
user communities in solving organisations’ problems. User communities have the advantage of
being able to help companies find knowledge that had previously been hidden for them (Feling &
Zenger, 2013).
When the companies make governance choices, Felin and Zenger (2013) suggest that this is done
based on whether locus of knowledge is known or not, and how well a mix of instruments
supports finding solutions to problems that vary in degree of complexity. Companies must thus
diagnose the complexity of their problems and whether they know the locus of knowledge or not,
as well as evaluate the characteristics of the associated supportive instruments, to choose the
optimal form of governance for the problem at hand.
2.5.1 INTELLECTUAL PROPERTY RIGHTS

Alexy et al. (2009) suggest that intellectual property rights at times may be viewed as an
impediment for open innovation, as the ownership of potential rights will have to be negotiated
with possible partners, or that a patenting process may prolong or inhibit the development
process. They do, however, stress that intellectual property rights can also be a potential
facilitator of collaborative research and development activities. This may occur, when secured
intellectual property rights help the organisation to open up to external partners, as the rights can
safeguard against misappropriation, because licencing is an easy way of transferring technology,
and because patented technologies are thoroughly described and may therefore be easier to
understand and evaluate (Alexy et al., 2009). Therefore, Alexy et al. (2009) propose that
intellectual property rights may be more valuable as signalling device than when used as a control
mechanism.
When practising closed innovation within companies, employees mostly by default in employment
relationships sign over the intellectual property rights produced to the company, as part of the
agreement of exchanging their labour for a monthly salary. By contrast, in markets or contractual
relationships transactions includes exchanging money for solutions, often in the form of property
rights or licencing agreements (Lakhani & Panetta, 2007; Felin & Zenger, 2013). For alliances and
partnerships the distribution of intellectual property is not as clear cut. Whenever possible, an
agreement of how to distribute property rights is settled before actively engaging in the problem
solving, however, it may also be settled on during the process, as the issues arise (Feling & Zenger,
2013).
Like in closed innovation processes the distribution of property rights are given by the focal
organisation, and most problem solvers selecting to participate in contests, tournaments or on
innovation platforms give up their property rights, as part of the agreement of participation, or as
a consequence of producing the winning solution. Similarly, when working with users or user
communities the property rights are as a general rule also assigned the focal organisation, as this
is often a condition for participation (Feling & Zenger, 2013).
2.5.2 INCENTIVES
Whereas managers in closed innovation processes can decide who should participate, in open
innovation self-selection is important. Lakhani & Panetta (2007) suggest that participants in open
innovation may be motivated by economic incentives as well as more intrinsic parameters, such as
the enjoyment of participating and the greater good for the society. Incentives may therefore be
closer or more loosely tied to the actual outcome of the innovation process.
As it was established, that in most cases the intellectual property rights do not belong to the
employees in closed innovation, they do not work as well as motivating incentives. In closed
innovation internal cooperation and knowledge sharing is encouraged, and this leads to a more
low-powered set of incentives tied less directly to performance of bringing about solutions (Feling
& Zenger, 2013).
When governing problem solving through markets or contracts, solutions are often bought for an
agreed upon price. The performance-outcome relationship is therefore a lot closer for these
relationships. While partners, alliances and corporate venture capital are also external entities, the
focus is not only on the result but also on the collaboration process. Therefore, the incentives
employed in such relationships are thus more loosely tied to the final result as they must also
motivate the parties’ ongoing collaboration and knowledge sharing (Feling & Zenger, 2013).
Incentives used for cooperating through contests, tournaments or innovation platforms are closely
tied to performance, as the top solution is often rewarded a monetary price. However, the self-
selecting participants are not only motivated by the price, according to Felin and Zenger (2013)
motivation falls into two categories, of which both are important “(1) the expected probability of
winning the prize, net of costs of effort, and (2) the intrinsic rewards of participation” (Felin &
Zenger, 2013, p. 8).
When choosing to include users or user communities in problem solving activities there is
generally no monetary reward. Instead, users tend to be motivated to take part in the work, to
benefit their own user experience through improved products, or new products solving a need
experienced by the users which is currently not fulfilled. Some users may even be motivated by
helping with interesting problems to benefit the society at large. The motivation for participating
is therefore highly intrinsic and relates in a higher degree to the process of problem solving and
the benefits of obtaining a result, rather than a performance based motivation (Feling & Zenger,
2013).
2.5.3 COMMUNICATION
Knowledge sharing within companies is less costly than with external partners as “A common
identity and language facilitate extensive and efficient knowledge sharing” (Felin, & Zenger, 2013,
p. 6). Therefore, closed innovation is also suitable for solving complex problems. In authority-
based hierarchies managers decide when knowledge sharing should occur and facilitates the
process, whereas consensus-based hierarchies foster rich and widespread knowledge sharing
among peers. Therefore, it is more critical for the manager in authority-based hierarchies to know
the locus of knowledge, than it is in consensus-based hierarchies (Feling & Zenger, 2013).
Markets or contractual relationships do not foster a lot of knowledge sharing as it is mainly aimed
at acquiring final solutions. Here, especially the paradox of the value of information described by
Arrow (1962) comes into play. Therefore, markets or contractual relationships are more suited for
simple and decomposable problems. Contrasting the very result oriented market governance,
choosing to work with partners, alliances or corporate venture capital leaves room for a more
open process. In this case the company work in a joint effort, with the external parties to bring
about a solution. The communication amongst these parties is therefore also richer, to support
the ongoing collaboration and problem solving. As this form of governance is suitable for
moderately complex problems, this though also demands that the focal organisation manage the
process (Feling & Zenger, 2013).
Choosing to employ contests, tournaments or innovation platforms leaves some of the process
management and facilitation to third parties. As mentioned above, they can broadcast the
problem widely to external actors not already known by the focal firm. The communication for
these governance choices is therefore very broad, but not very deep, as ongoing communication
and knowledge sharing has a lower priority. Contrary to contests, tournaments and platforms
there is focus on rich and continuous communication and knowledge sharing with a broad
audience, when involving users or user communities in problem solving activities. For the contests,
tournaments or platforms as well as for users and user communities, it is relevant to stress the
role of digitalisation which has “lowered the cost not just for firms posing problems, but also for
the external audiences that provide potential solutions” (Feling & Zenger, 2013).
Closed innovation Open innovation
Authority-based Consensus-based Markets and Partners, Contests, Users and user
hierarchy hierarchy contract based alliances and tournaments and communities
relationships corporate innovation
venture capital platforms
Intellectual Owned by focal Owned by focal Externally owned Negotiated Most often at Most often
property rights organisation organisation or bought from between parties least property owned by focal
external sources before or during rights of winning organisation
the cooperation solution, if not all,
will go to focal
organisation
Incentives Loosely tied to Loosely tied to Closely tied to Loosely tied to Closely tied to Loosely tied to
solution – more solution – more solution solution – more solution but the solution – more
focus on the focus on the focus on the process also focus on the
problem solving problem solving problem solving infuse other problem solving
process process process incentives process
Communication Manager Rich, ongoing Limited Rich, ongoing Broad but not Rich, ongoing
pattern facilitates communication communication communication deep communication
communication and knowledge and knowledge and knowledge communication and knowledge
sharing sharing sharing and knowledge sharing
sharing facilitated
by third parties
Optimal level of Complex and Complex and less Simple Complex and less Simple Complex and less
problem less decomposable decomposable decomposable decomposable decomposable
complexity decomposable problems problems problems problems problems
problems
Locus of Locus of Known locus of Most often, locus Most often, locus Known as well as Known as well as
problem solving knowledge must knowledge less of knowledge of knowledge unknown loci of unknown loci of
knowledge be known to the important must be known to must be known to knowledge knowledge
manager some extent some extent
TABLE 1 - GOVERNANCE CHOICES AND SUPPORTING INSTRUMENTS (ADABTED FROM FELIN & ZENGER, 2013, P. 5)
3 METHODOLOGY
As illustrated below, this thesis is based on a theoretical foundation of literature relating to the
topics of innovation, open innovation, knowledge transfer, locus of knowledge, complexity of
problems and the overlaps hereof, which as a whole creates a platform for discussing and
examining the new perspective on open innovation proposed by Lakhani et al. (2013) and Felin
and Zenger (2013).
In addition to a theoretical base, Yin (2011) suggest that when doing qualitative research it is
advisable to enter the field early in the research process, as qualitative studies aims at examining
real-life conditions. Entering the field can be beneficial for designing the problem formulation, and
the researcher can learn whether there may be methodical issues to rethink, which perspectives
may be relevant to uncover, or whether the topic of interest should be sharpened or re-shaped to
optimize the design and results of the study. Having gathered inspiration and impressions from the
field, the researcher is better able to settling on a suitable study methodology and relevant
research questions (Yin, 2011).
This approach was used here. Initial informal talks were held with Med Tech Innovation Center, a
med tech cluster organisation, which later also served as contact point for sampling. These talks, in
combination with the initial literature review, helped the researcher sharpen and re-shape the
problem formulation. This knowledge also provided a platform for carrying out sampling for
interviews, which is the main data collection method of this thesis.
FIGURE 3 – ILLUSTRATING THE TOP LEVEL RESEARCH PROCESS
The literature, which this thesis is based on, takes its starting point in open innovation and fields
related to this phenomenon. Looking at open innovation, the author also found it relevant to shed
further light on the topics of knowledge transfer and locus of knowledge. Both locus of knowledge
and especially the complexity and decomposability of problems were topics of concern for Lakhani
et al. (2013) as well as Felin and Zenger (2013) and were thus also included in the review.
Literature searches with the above mentioned key words complemented citation searches based
on the two main articles by Lakhani et al. (2013) and Felin and Zenger (2013) and main
contributions to open innovation. During the process, the literature was also expanded by citation
searches on other articles during the process of reviewing literature.
The wish of the author is to explore the perspective on open innovation brought about by Lakhani
et al. (2013) and Felin and Zenger (2013) further in a complimentary setting. Rather than
speculating about how this perspective is applied to small companies and setting up a hypothesis
to confirm or reject, the author wish to study the elements of the proposed theoretical
contributions in small companies, without having any preconceived expectations of emerging
patterns. This is done to gain a further understanding of this new perspective, and with an aim of
acquiring new knowledge in this process, which may support or extend the current literature.
Therefore, this study, as most studies, has both deductive and inductive elements, though with an
emphasis on the latter. The point of departure for the thesis is the literature described above,
which will be a deductive foundation.
The research approach for collecting empirical data for this thesis will be qualitative, which is
chosen to gain insights to, and a deeper understanding of, the process of decomposing products
into smaller problems and making a governance choice for the problem solving process. The aim is
to get an in depth understanding of this process in small companies and from that draw parallels
to the theorising made based on observations of large corporations. As the perspective brought
about by Lakhani et al. (2013) as well as by Felin and Zenger (2013) of open versus closed
innovation is relatively new, using a qualitative approach will make this thesis more likely to be
able to uncover new information not already known about this perspective (Blumberg et al.,
2008). The qualitative approach is therefore suitable as it allows for elements of exploration as
well as for testing the applicability of a theoretical perspective in a different setting than originally
presented. Stake (2000) emphasises this as an advantage of a problem-based case study, namely
that the results are more easily applicable and can be compared to previous knowledge.
An important feature of qualitative research is that studies are carried out under real-world
conditions, and that it is sought to understand the perspectives of those involved, while also
considering contextual factors (Yin, 2011). Qualitative methods therefore open up the possibility
of gaining an in-depth understanding of a phenomenon, especially if it is a process or a complex
phenomenon that is under study, as in this thesis. Using qualitative research methods explore the
views of the respondents too, as they have a better opportunity to answer freely, than if their
answers have to be recorded on a predefined scale (Yin, 2011). Since the in-depth understanding
of the phenomenon is more important in this case, than understanding the impact measured
quantitatively, the case study and the qualitative research methods are found to be suitable. The
results shall not be quantified but rather be reflected upon. However, the researcher reflectivity is
what critics would call a disturbing variable (Flick 2009), because the researcher is involved in the
study both in the interview situation and also when analysing the gathered data. Therefore, to
leverage the risk of bias produced by the researcher, it is important to also look for rival
explanations of confirmations found in the data (Yin, 2011).
3.1 CASE STUDY

Flick (2009) states that “qualitative research is oriented towards analysing concrete cases in their
temporal and local particularity and starting from people’s expressions and activities in their local
contexts” (Flick 2009, p. 21). Flyvbjerg (2006) argues that “The advantage of the case study is that
it can ‘close in’ on real-life situations and test views directly in relation to phenomena as they
unfold in practise” (Flyvbjerg, 2006, p. 235). This is also why case studies are widely used and are
also very effective for management research, according to Blumberg et al. (2008), as it allows for a
combination of theoretical and practical input. This is especially the case when researchers seek
the answers for why or how phenomena arise. Investigating multiple cases increases the
robustness of the study, however, when studying multiple cases these cases must be selected with
care (Blumberg et al., 2008).
This study has the aim of discovering, in practice, how small companies divide their innovative
products or process into smaller parts, and decide whether they should deal with them internally
or involve external expertise. Stake (2000) calls the investigation of multiple cases a ‘collective
case study’ and describes it in the following way; “a researcher may jointly study a number of
cases in order to investigate a phenomenon, population, or general condition. … Individual cases in
the collection may or may not be known in advance to manifest some common characteristics”
(Stake, 2000, p. 437).
Blumberg et al. (2008) expands on this view by suggesting that case studies put more emphasis on
getting an in-depth understanding of few cases, rather than a more scarcely focused
understanding of many. To obtain this deeper understanding of the cases as well as their context,
the interaction, in this case interviews, is therefore also done in the natural setting of the
companies.
3.2 SAMPLING
When it comes to selecting cases in qualitative research design Yin (2011) state that “In qualitative
research the samples are likely to be chosen in a deliberate manner, known as purposive sampling.
The goal or purpose for selecting the specific study units is to have those that will yield the most
relevant and plentiful data, given your topic of study” (Yin, 2011). Flick (2009) operates with the
term theoretical sampling, which is very similar to purposeful sampling. When doing theoretical
sampling the researcher must review whether information saturation has been reached, or
according to which criteria new cases must be selected. It is therefore a process done stepwise, so
that every time a case or a group of cases are selected then the maturation must be evaluated. As
stated in the delimitation, the study was carried out with case companies from the med tech
industry, which is a part of the Danish health care sector, an important stronghold for Denmark.
Six cases were chosen for investigating their use of complex boundaries. After they had been
examined it was decided that it could be beneficial to add additional cases to control for the
location and cluster that all of the six initial cases belonged to. Therefore additional two cases
where added from another regional cluster.
It can be claimed that theoretical sampling is also purposeful sampling, but that purposeful
sampling does not necessarily have to be theoretical. This is due to the fact that while cases may
be purposely selected to yield relevant and plentiful data, the cases chosen may not necessarily
reach information saturation. With regards to this study, the sampling can be considered both
purposeful and theoretical. The aim of the sampling were to select cases delivering the greatest
insight to the issue under investigation as stressed by both Flick (2009) and Yin (2011).
Theoretic and purposeful sampling is done according to the relevance of cases rather than their
representativeness (Flick, 2009; Yin, 2011). Sampling should stop when theoretical maturity is
reached, which means that the amount of value adding knowledge derived from additional data is
not outweighed by the efforts spend on obtaining it. This is the ideal, however, it is also important
to consider resources, as limited resources may determine when to stop the sampling too, as
qualitative data is resource demanding to collect. For this thesis interviews were the main method
for data collection, which is resource demanding to carry out as well as transcribe and analyse.
This thesis is therefore limited to investigating the above mentioned six plus to cases, at which
point it was decided that the amount of knowledge gained in by adding further units of analysis
would not outweigh the allocation of the limited resources.
When designing a study with explorative elements it is not a top priority to have a representative
sample, but rather to get information from insightful sources of knowledge. Therefore, this study
does not have a sample that is perfectly reflecting a defined population, and is not found through
probability sampling techniques. While Blumberg et al. (2008) state that probability sampling is of
technical superiority of the purposeful sampling, Flyvbjerg (2006) cites this as one of five common
misunderstandings with regards to case studies. The force of example may be as useful for
scientific development as generalisations, and that this is heavily undervalued. Flyvbjerg (2006)
highlights that “the case study is useful for both generating and testing of hypothesis but is not
limited to these research activities” (Flyvbjerg, 2006, p. 229) as he believes that cases are highly
relevant for creating scientific knowledge, especially within social sciences.
In qualitative research generalizability to a population is not the ultimate goal, neither is it for
single case studies nor multiple case studies. “Even for collective case studies, selection by
sampling of attributes should not be the highest priority. Balance and variety are important;
opportunity to learn is of primary importance” (Stake, 2000, p. 447). Further, cases can be selected
to “differ from each other on theoretically important dimensions” (Blumberg et al., 2008, p. 377) as
it may be useful to obtain information about various circumstances by selecting cases differing on
one or more dimensions (Flyvbjerg, 2006).
The aim is to uncover and understand a phenomenon, that is not measurable on a common scale,
rather than measuring the extent of the phenomenon, and project the findings to a population
(Blumberg et al., 2008). This means that seeking to understand the phenomenon of complex
boundaries should be understood in the context of the individual cases investigated, for thereafter
to conclude whether there appears to be a pattern of how this phenomenon is applied in the real
life context, and whether this pattern is consistent with the ideas laid out by Lakhani et al. (2013)
and Felin and Zenger (2013).
By including diverse cases a variety in the field can be disclosed, and it allows for gaining an
understanding of the researched phenomenon from different perspectives. To ensure diversity
according to relevant criteria, the structure of the sampling includes a priori defined dimensions.
While a priori sampling dimensions results in a subjective starting point, it is emphasised by Yin
(2011) that such deductive elements can be a good idea as “It can save you from suffering through
a lot of uncertainty in doing your initial fieldwork because you would have started with relevant
concepts rather than waiting for them to emerge”. As illustrated in tables 2 and 3 below, the
sample is therefore constructed according to a matrix structure, with two predefined criteria,
enabling the exploration of differences or similarities of companies falling into the different
categories of these criteria.
The two dimensions used in the sampling were market pull versus technology push and whether
the products were patent protected or not. These dimensions have arisen from the process of
reviewing relevant literature, and through entering the field as described above. Especially the
talks with the cluster organisation helped clear up preconceived ideas that proved not to have
root in reality. Felin and Zenger (2013) state that “All innovation admittedly does not begin with a
clear problem, though deliberate or non-serendipitous forms of innovation do” (Felin & Zenger,
2013, p. 3). Building on this statement, all innovations must then be solutions to problems or ideas
from either inside or outside the company (Felin & Zenger, 2013; Brem & Voigt, 2009). However, it
may be different whether the market articulated the problem based on a non-satisfied need
(market pull), or whether research and technological development makes it possible to solve
problems not yet articulated by the market (technology push) (Brem & Voigt, 2009).
Brem & Voigt (2009) do though point out that products are seldom based purely on either market
pull or technology push, but rather a mix hereof, but that most products do have a combination of
the two, where either market pull or technology push is the dominant driver. The market pull
technology push sampling dimension was therefore chosen, as the initiation of the problem
solving has essentially been internal or external. It would therefore be interesting to see whether
having an internal or external starting point has an influence on communication and cooperation
pattern when involving outside partners.
Second, an additional dimension, intellectual property, was added in the sampling. Essentially,
product ideas can be patented and patents can be put on the market before final products are
developed. In this respect product ideas can obtain value in a market, and could according to
Schumpeter (1911 & 1934) be considered innovations in this respect. However, in this sampling
process, this dimension is included as patenting innovations can be used to protect innovations
before reaching out to the market and embracing the open innovation approach. Contrastingly, it
may signal a suspicious attitude, as the company may suspect potential partners to copy the
product concept or parts hereof. It could therefore be interesting to see if companies with
patented products experience the same attitudes towards complex boundaries as companies
holding no patents. Bringing companies into the study, who have not patented their products also
adds a further perspective to the suggested bundles of supportive instruments that according to
Felin & Zenger are decisive for governance choice.
The two dimensions create a matrix-like framework which was used for sampling, and which is
shown below. Further, as described two additional companies from another regional cluster were
added to contrast the main sample and to increase the robustness of the findings.
Central Denmark
Region Med Tech
Cluster Patent protected products Non-patent protected products
Market pull  Health Equipment Denmark
 Visikon
Clip for fixing tubes
Animated patient information
 Rhinix
platform
Nasal allergy filter
Technology push  Chromaviso
Ergonomic lighting  Playscapes
 Nordisk Røntgen Teknik Digital ‘living’ painting
X-ray equipment
TABLE 2 – FIRST STEP OF SAMPLING
North Denmark
Region Med Tech
Cluster Patent protected products Non-patent protected products
Market pull  Therm Aid
Products for emergency services
and elderly care
Technology push  Medichanical Engineering
Measuring tool for hip-
replacement surgery
TABLE 3 – SECOND STEP OF SAMPLING
The unit of analysis is the company, though with a focus on the problem decomposition, problem
solving and governance choice process. However, while the unit of analysis is the company, the
unit of data collection is though interviewees in leading positions in the companies. An overview
of the case companies and the interviewees can be found in Table 4.
Company Interviewee Title Background Product Origin of Patent Cluster
description product idea protected
Health Mads Hemdorff Founder & Corporate Clips for fixation of Market pull Yes Central Denmark
Equipment Petersen COO communicatio medical tubes Region med tech
Denmark n cluster
Rhinix Peter T. Kenney Founder Medical Nasal filter for Market pull Yes Central Denmark
Hansen student - Ph.D respiratory Region med tech
allergies cluster
Visikon Anders Nejsum Co-founder Animation and Animated patient Market pull No Central Denmark
& CEO communicatio information Region med tech
n platform cluster
Chromaviso Anders Kryger Founder & Sales and Ergonomic lighting Technology Yes Central Denmark
Managing marketing and circadian push Region med tech
Director rhythm lighting cluster
Nordisk Mogens Ravn CEO Mechanical X-ray equipment Technology Yes Central Denmark
Røntgen engineering push Region med tech
Teknik cluster
Playscapes Charlotte Prang Creative Painter Digital ‘living’ Technology No Central Denmark
director painting push Region med tech
cluster
Medichanical Eske W. Co-founder Production Orthopaedic Technology Yes North Denmark
Engineering Petersen & CEO engineering measuring tool for push Region med tech
hip-replacement cluster
surgery
Therm Aid Finn Jensen Founder Emergency Products for Market pull No North Denmark
services emergency Region med tech
(ambulance & services and cluster
rescue diver) elderly care
TABLE 4 – OVERVIEW OF CASE COMPANIES (PLEASE SEE APPENDIX II FOR MORE DETAILS)
According to Yin (2011) “most qualitative studies have more than one level of data collection unit
… [which] are likely to fall within a nested arrangement: a broader level (e.g. a field setting) that
contains or embeds a narrower level (e.g. a participant in the setting)” (Yin, 2011, p. 82). Following
this logic, the field setting of this study is the regional med tech clusters of North Denmark and
Central Denmark respectively, in which the companies are embedded units.
As mentioned in the delimitation the companies studied in this thesis was approached through
regional med tech cluster organisations. This of course means that only med tech companies who
are actively engaging in the cluster networks have been considered for the study. It does,
however, not limit the quality of the study as the aim is not a universal generalisation as
mentioned previously. It is an approach that may to some extent limit the variation amongst cases
in the sample, as organisations not affiliated the cluster networks are not included.
Both regional cluster organisations offer advisory services, relevant lectures and small amounts of
funds, that can be applied for, to increase the quality of the products and organisational
competencies. Therefore, the author expects it to be attractive to take part of the activities of
these regional cluster organisations. Further, both cluster organisations focus on companies with
potential for growth. Therefore, these companies are attractive to investigate, as they can be good
examples. Hence, it is not assessed to be a problem, that the companies examined have been
approached through the regional cluster organisations, although it may be expected, that
companies are not completely closed, if they do reach out to cluster organisations. Using an
organisation for sampling is also not a new approach to case studies. It is often seen for internal
organisational studies, but was for instance also done by Sieg et al. (2010) when investigating
managerial challenges in open innovation, by approaching companies through the innovation
intermediary Innocentive.
3.3 DATA COLLECTION METHODS

It is possible to divide data collection into two main methods. One approach to data collection is
to review material available without having an interaction with anyone, while the other approach
is to interact with respondents. A good study combines these two methods of data collection
(Blumberg et al., 2008). Information available about the case companies on the internet has been
studied. This includes information about the companies on their own websites, on cluster
organisation websites, in the CVR register and in patent registers. This information was though
mostly used as background information as well as for sampling according to the two dimensions
mentioned above, as the information available for some of the case companies was rather limited.
Therefore, the main weight has been put on the rich qualitative data gathered through interacting
with the senior level staff from the companies.
For the interactive data collection, interviews were chosen due to this method’s strength in
delivering data for expanding the understanding of a phenomenon. Interviews were chosen
instead of observations, as they would lead to bigger possibilities of gaining understanding of how
the process under study had unfolded, and how decisions had been taken underway. Additionally,
interviews can provide the researcher with an understanding of how the companies, through the
eyes of interviewees holding top positions, had experienced the problem solving process. A
longitudinal study could probably reveal some information through observing activities, however,
decision-making is to some extent an internal process, which can be very hard or close to
impossible to observe and so is the experience of the process. In addition, the time constraint of
this thesis has led to favouring a cross-sectional study, which is done at only one point of time. To
get more information than only current activities, the researcher though also asked about past
activities and future expectations, and thereby attempted to approach some of the benefits of the
longitudinal study through the cross sectional study.
3.4 INTERVIEWS
When collecting data through interviews, which requires interacting with respondents, it must be
considered that the interviewer can intervene in the social system they enter. Attention given to
respondents may influence their behaviour or their answers. First of all, actors may become aware
of the systems and context they are embedded in, and therefore make them pay attention to
topics, which had not been consciously reflected upon to the same extent. Secondly, the
respondents may wish to be perceived differently than they actually are – especially if sensitive
issues are discussed (Flick 2009). Therefore, it is important to be aware of the fact that the
quantity as well as the quality of information gained from interviews depends not only on the
interviewer and the setting, but also of the ability and willingness of participants to cooperate
(Blumberg et al., 2008).
The aim when doing interviews is therefore to enter as neutral as possible. Respondents may
perceive their actions differently than if the researcher would have observed their actions, and
such discrepancies can be due to both researcher and respondent errors. Additionally, answers to
questions about past behaviours and future expectations must be considered with care, as they
rely on the memory of the respondents and their selection of important events.
With regards to the specifics of this study design the interviewees were approached through the
regional cluster organisations. In the interviews the companies were asked to elaborate on the
role of the cluster networks, however, not the quality of the experience, but to be aware of any
possible interference with the findings. Such data must though be handled with care, as it could be
affected by the context of the cluster organisations being the go-between. That said, interviews do
provide a depth of information and detail, which can be even further secured by the interviewer
being able to elaborate on questions or probe for more detailed answers (Blumberg et al., 2008).
Therefore, interviews were preferable in this situation, and the influence of the interviewer were
sought to be kept at a minimum.
When interviewing it must be ensured to have good informants, who are characterised by having
“the necessary experience and knowledge, the ability to reflect and articulate, the time, and be
ready to participate” (Flick 2009, p. 123). In this study the interviewees were considered to fulfil all
of these criteria. They all held top positions of the case companies, and most were also the
founders of the companies. In addition, the interviewees got a short introduction to the study
before agreeing to take part in it, and further introduction to the themes of the interview in an
email in advance of the interview. The interviewees, therefore, were fully aware of what they
volunteered their time for and which information was expected from them.
It is not only the interviewees that must possess certain qualities, so must the researcher.
According to Yin (2011) qualitative researchers must be good at listening and being observant,
asking good questions, caring about the data, and be perseverant and well-informed about the
topic of the study. Even though a self-assessment is naturally subjective, the author found that
these criteria were also fulfilled as they, combined with a personal preference, were significant
factors in deciding on designing a qualitative study.
As mentioned above, the interviewees were informed about the study before the interviews. At
the interview itself, a short introduction to the study was again presented by the interviewer. A
such explanation of the study also leads to motivating the participants, and for them to find it
meaningful to participate. However, it is important that the information provided is not be too
detailed as this cause a danger of creating bias at the interviewee prior to the study (Blumberg et
al., 2008). This study was conducted in an inductive manner with an open mind to findings not
necessarily being in line with the articles that forms the foundation of this thesis. By not having
expressed hypothesis or propositions to confirm or reject, the bias to possibly be transferred from
the interviewer to the interviewee was considered very limited.
Following the short introduction to the study, a very general question was posed, leading to an
almost narrative account of the product development efforts of the company with a varying
amount of detail. The interviews were introduced by the invitation to a narrative account, to get a
better understanding of the experience of the process. What was not reviled through this
narrative was thereafter asked about by the interviewer, who made sure that all relevant topics
were to be covered by checking with the prepared interview guide.
The interview form described above falls in between the unstructured and the semi-structured
interview. The elements used characterising a semi-structured interview, was an interview guide,
ensuring that all relevant topics were covered. The interview guide did though leave freedom to
change order or wording of questions to fit the individual interview situation, but still induce a
structure that ensures that the relevant questions are covered in the interview. This interview
form also leave room for gaining new knowledge during the interviews and letting interviewees
elaborate on the aspects they find important.
The very open introductory question encouraging a narrative is though a feature borrowed from
the unstructured interview. Encouraging a narrative leaves room for the interviewee to express
what they consider to be relevant factors, and therefore to gain knowledge of the phenomenon
from their perspective. Some interviewees were very thorough in their narrative and needed only
little probing to cover all relevant topics, whereas other interviews called for more structured
follow-up questioning.
3.4.1 THE INTERVIEW GUIDE

While it is important to get to know the interviewee’s perspective, an interview guide ensures that
the researcher also get the topics covered which may not be mentioned through the opening
narrative. The interview guide or topic list also makes sure that the same issues are addressed in
all interviews, even though they may not be asked in the same way. Not following the structure of
the interview guide perfectly decreases the comparability, however, it adds to the explorative
nature of the interviews.
That the interview guide is just that – a guide – naturally leaves room for the researcher to
formulate the questions to fit the interview situation, to probe for elaboration, or asking
interpreting questions to ensure that the interviewee is understood correctly.
The interview guide was developed from the problem statement, which is:
Which leads to the two-parted focus of both the problem decomposition, formulation and solving
as well as the governance choice for the problem solving process. Therefore it was found relevant
to ask about the following topics based on the literature review:
 Complexity and decomposability
 Locus of knowledge
 Property rights
 Incentives
 Communication - focus on result or process
 Confirmation of market pull or technology push
 The role of the cluster
See the full topic list and interview guide in Appendix III.
3.4.2 THE TECHNICAL ASPECTS OF INTERVIEWING

The interviews were sound recorded, as this is less disturbing than for instance using video
equipment. However, it is important to be aware that electronic recording equipment can have an
influence on the interviewees’ willingness to share, even though the least invasive recording
instrument has been chosen (Flick 2009). To record the interviews enables the researcher to
transcribe them for the purpose of coding later in the study.
3.5 CRITERIA OF QUALITATIVE RESEARCH
When doing qualitative research it is important to fulfil some criteria that improve the robustness
of the study and thereby also the results. According to Flick (2009) these criteria include reliability,
and validity, which relates to whether the study actually represents the true reality. Yin (2011)
further adds that the researcher must also pay attention to rival explanations and demonstrate a
continual sense of scepticism with regards to the confirmation of expected results.
Reliability in this case relates to whether interviewees actually express their true opinions and
experiences about the processes investigated. As mentioned above the interviews were recorded
with only the sound, and were done so with a mobile phone, which is a common object creating
very little disturbance, compared to for instance using video equipment. But this can have an
influence on the interviewees’ willingness to share. While it may be an issue for very personal
issues or taboos, the reliability was not considered to be at stake in this study, although the
researcher sis keep in mind that the contact to the companies had been facilitated by the cluster
organisations, with which the companies had also had contact and received advice from. However,
since the interviews are done by a researcher not associated with these cluster organisations it is
assumed that the reliability has not been affected.
As the secondary data used in this study, were mainly used for background knowledge, the single
empirical data collection method were interviews. Therefore, reliability could not be ensured by
method triangulation - the use of different methods to complement each other or using different
kinds of data to cover blind spots. The only triangulation possible in this thesis is thus the
comparison of data and findings to previously constructed models within the area of innovation.
Validity is also a highly relevant criterion for doing qualitative research, even though is not a
bivariate concept as in quantitative research (Yin, 2011). The research findings are second degree
constructs – constructs based on the constructs of the interviewees. But if they are well-grounded
and supportable then the findings can be deemed valid (Flick 2009), which is believed to be the
case in this study.
3.6 LIMITATIONS OF THE STUDY LIMITATIONS OF METHODOLOGY APPLIED IN THE STUDY

Before looking at the results of the analysis it is important to be aware of the limitations of the
study. As limitations may influence the applicability of the results, they are important to mention.
Main concerns are that the sample of this study was rather limited due to the time constraints
that applies because the study was done singlehandedly.
The interviews were conducted in Danish for the convenience of the interviewees, and then
transcribed in Danish too. Not until the process of coding were the underlying meanings translated
into English. This procedure was followed to mitigate the risk of wrong interpretations. Further,
the researcher has experience in translating and interpretation between Danish and English and
the potential for errors of translation is therefore considered to be minimal.
4 QUALITATIVE ANALYSIS
When analysing qualitative data Yin (2011) suggest a five step process:
1. Compiling
2. Disassembling
3. Reassembling
4. Interpreting
5. Concluding
While this process is shown in a step by step manner it is important to note that the phases can be
overlapping and that you can move back and forth between the steps. It is thus not necessary to
wait to the interpretation phase to think about the possible meanings of the data compiled,
disassembled and reassembled. It can be an advantage the continuously consider insights gained
when working with the data.
For the analysis of the data collected for this thesis, the interviews, were transcribed and then
coded. When compiling the data, Yin (2011) also suggest familiarising oneself with the data. In this
case the author familiarised herself with the data through transcribing, relistening, and rereading
transcriptions.
For the disassembling phase the author chose to code the data using computer assisted qualitative
data analysis software. Coding the data ensures a higher rigidity in the data analysis, than if done
without the coding process (Yin, 2011). During the coding, sentences with similar topics were
coded to the same theme. This is done in a very systematic way, sentence by sentence, ensuring
that the entire collection of interviews has been carefully given thought. This method is referred to
as open coding and is considered the first step of grounded theory coding (Flick, 2009; Yin, 2011).
The grounded theory method suits the inductive spirit of this study well as it allows the author to
extract meaning from the case studies, rather than looking for confirming or rejecting a hypothesis
posed at the beginning of the study. The open coding is then followed by the axial coding where
the themes identified during the open coding is related to each other and grouped accordingly and
through this categorisation a higher conceptual level is reached (Flick, 2009; Yin, 2011).
While, the researcher continuously must consider emerging patterns during the coding process, it
is in the third phase, reassembling, that these patterns are conceptualised. Hierarchical arrays
were constructed as part of the axial coding in which similar codes or codes relating to similar
categories were grouped (Yin, 2011). Having grouped the data in hierarchies it was possible to look
at the different topics investigated, interpreting the answers and comparing those across the a
priori defined sampling criteria. This was done through reviewing the coded data within the topics
and interpreting on this data. This resembles the last step of open coding, the selective coding
where Flick (2009) suggests looking at strategies of action or interaction, which causal relations,
and context and intervening factors that may influence the central phenomenon. Further, the
consequences of the central phenomenon should also be investigated.
In the interpreting phase it is important to comprehensively cover the data. Therefore, the
interpretation must be complete, fair, accurate, value adding and credible (Yin, 2011). It must
therefore be ensured that the interpretation of the study could also be reached by others and is
reflecting the data material. Additionally, the study should add value in the form of new
knowledge rather than just repeat the literature in the field. When interpreting the data it must be
strived for finding a balance of not being too detailed nor too superficial (Yin, 2011). Therefore,
the interpretation phase was an interchanging process of reviewing the coded data and
formulating the findings. The findings are thus presented in general terms as well as with
illustrative examples from the data.
When reaching the concluding phase of the data analysis the researcher must put the findings into
perspective. This can be done in several ways. If the study uncovers areas where more knowledge
is needed the researcher may pose questions to be answered by future research. The study may
also be concluded upon by relating it to the literature in the field. It may expand previous research
and thus contradict or confirm what has previously been studied. Finally, propositions may be
constructed to try to explain key findings.
When using computer assisted qualitative data analysis software is it important to resist using the
built in functionalities for frequency counts and percentage distributions of codes unless it is a part
of the study design. These essentially quantitative measures rarely belong in qualitative research.
Instead the meaning of the quantitative data should be receiving the most attention (Yin, 2011).
4.1 FINDINGS
The data gained in the study indicates that the companies deal with the development of
innovative products through a four-step process. While it is not a process that is explicitly
expressed, the case companies seem to initially start their process of dealing with problems in
their product development process by focusing on structuring the problems through either
conscious or unconscious efforts. This is for instance done by formulating success criteria for the
final solution. The interviewees expressed this for instance by stating that they had to think
through the product, that they set specific guidelines for solving the problems and that they made
a mock up for their own sake to see how to structure such a product.
Having structured the problems to some degree, the companies have also gained an
understanding of which knowledge could solve the problems. It is then assessed whether this
knowledge is held internally in the company or not. The case companies being as small as they are,
have a good overview of the internal knowledge and competencies, and the interviewees all
describe that they are well aware which knowledge and competencies that are held within the
company and which are not. Thus when they know what knowledge is needed this is compared to
the internal stock of knowledge and competencies. Then, if the knowledge is not considered to be
held within the company, knowledge and competencies are sought located outside the company.
Some of the interviewees, co-founders of Health Equipment Denmark and Medichanical
Engineering, adds that while some competencies are held internally, the expected quality must
also be assessed and compared with the quality wished for in the final solution. If the level of
quality is not a match this may also lead to the involvement of external parties.
When having decided to involve external parties in the problem solving process, the next step is
naturally to locate the knowledge and competencies sought for externally. Not all loci of
knowledge were though known up front by the focal companies, but they were all located by the
focal organisation during the development process. This process outlined above is also illustrated
in Figure 4 below.
FIGURE 4 – PROCESS LEADING TO GOVERNANCE CHOICE ON PROBLEM LEVEL
4.1.1 THE PROBLEM STRUCTURE ’S INFLUENCE ON GOVERNANCE CHOICE

Starting by assessing the complexity and decomposability of the innovative products and product
development processes a pattern of differing degree of complexity surfaces. It appears that
companies whose products were initiated by a market pull have more decomposable products
than companies whose products were initiated by a technology push. While Rhinix for instance is
able to break down the product into smaller parts and work with finding a suitable membrane in
parallel with designing the frame for wearing the nasal filter, Playscapes find their development of
content to the living digital painting to be a lot more intertwined with the software and hardware
also being parts of the products.
Working with a higher degree of decomposability allows the companies to go to a competitive

market with relatively well-defined problems that can be governed through contractual
relationships. One company, however, that does not follow this pattern, is Therm Aid, who instead
went for the partnering governance choice practising joint product development even though the
products were of a lower complexity and thus more decomposable. Therefore, this company is not
acting the same way as the additional companies with products initiated by a market pull. The
founder state, that he approaches partners with a good idea of the final product, and therefore
has a fairly structured problem, but that there is also some degree of joint development especially
with regards to material choice. This may be due to the fact that the founder of the company
expressed a greater interest in developing product concepts that could fill the gaps articulated by
the users, rather than running a business as such, which was seen more as the means to reach his
goal. As Therm Aid do not follow the pattern of the majority of the companies in this a priori
defined sampling category, this company therefore represents a negative case in the study, as it
does not follow the tendency found among the other companies.
The products initiated by a technology push, however, tended to be more complex and therefore
also less decomposable, as the example of Playscapes given above. As a result of working with
complex and less decomposable products, the case companies in the technology push category
thus report on a higher degree of joint development. The majority of the companies working with
these problems thus also sought out partners, with whom they could lead a joint product
development. When the different components in the product have a high influence on each other,
there is a greater need for rich communication and joint development, which is some of the
characteristics of the supporting instruments, when choosing the partnering governance form.
Again only one company separates itself in this context. Medichanical Engineering also
experienced a high complexity in their product, but rather than partnering up with other
companies, they instead experienced substantial joint development with the users, who played a
large role in the design and material choice of the tool developed. Medichanical Engineering
solved their complex problem in cooperation with users, but also employed a contractual
relationship for dealing with production maturation.
4.1.2 LOCUS OF KNOWLEDGE

As described above, the evaluation of whether the knowledge and competencies needed to solve
the problems are held internally or not, is done somewhat implicitly as the companies are small
and have a good overview of the internal stock of knowledge and competencies. During the
interviews, all the respondents describe how they found it rather clear which knowledge and
competencies was not mastered internally in the companies and therefore had to be sought
externally.
Some of the case companies had very well-defined internal core competencies which led to
dealing with the problems related to these, being dealt with on an only internal basis, such as the
animated communication by Visikon. Other companies also had specific core competencies, but
did not only work with these in a closed manner, like the artistic content and process of
Playscapes. Due to the small size of the companies, there is no need for a manager facilitating
contact and communication between employees. Therefore, only the consensus-based hierarchy
comes into play here for those of the companies handling some problems exclusively internally in
the organisation.
If the knowledge, however, was not held internally by the company, external sources of
knowledge was sought. While the external locus of problem solving knowledge was known by the
focal organisation sometimes, not all loci of knowledge was though known up front by the focal
companies. The case companies did though not find that they needed to broadcast their problems,
in order to find the right knowledge and competencies in the external environment. Instead, the
knowledge and competencies were all deemed to be within practical amounts of search, though
there were different approaches to doing this search. Most companies used their own network
and their extended network of for instance investors, partners or cluster organisations for locating
knowledge. Some companies though experienced the need for a broader search and employed
internet searches. One company even took contact to companies in the industry for advice on who
could hold the competencies needed for solving the problems. Thus, while the focal organisation
may know, that they do not possess the skills to solve a problem internally, they may not initially
know where, or in which form the knowledge they are seeking is. It was however still the focal
organisation locating the knowledge, and therefore not considered problem broadcasting with an
aim of external parties possessing the knowledge and competencies to self-reveal and self-select
into the problem solving process. On the issue of locating external knowledge there did not appear
to be any difference across the a priori defined sampling categories.
Although the companies were able to find the locus of knowledge, working with external parties
was not a problem free experience. Locating external partners through network and current
partners, may not lead to finding the best match for the problem and for the focal organisation.
An example of this was Health Equipment Denmark, who found that lack of prior experience made
it difficult to evaluate partners and the work produced during the problem solving process.
In addition to the knowledge held within the case companies, and what they could locate through
various governance forms, all the companies also utilises a varying number of external advisors
along their product development process. These advisors did not have the characteristics of any of
the other types of relationships. They could be casual relationships with acquaintances, incubator
advisors, teachers, lecturers or students doing relevant projects, all of whom only to a limited
extent participated in the problem solving or problem solving knowledge location. One case
company in particular, Rhinix, put a lot of emphasis on getting as much advice as before entering
into contractual relationships in the competitive market. This was a way of getting a bit more
information, for making the right decisions in fields of knowledge, where the founder was not
well-wandered. The cluster organisations also acted as external advisors. While the companies in
the Central Denmark Region experienced a heavy focus on professional discussions when
interacting with MedTech Innovation Center, the case companies from the North Denmark Region
experienced BioMed Community focusing on advice and knowledge sharing but also to a large
extent on the industry specific networking.
4.1.3 USING THE SUPPORTIVE INSTRUMENTS

All companies involved users in their product development process, however, none of the
companies employed user communities. An example of user involvement is that of Chromaviso
having an ongoing dialogue with hospital staff. The focus when involving users did though differ
across the a priori defined sampling criteria. In the companies with products arisen from a market
pull the idea and concept had obviously been developed in cooperation with the market and
thereby involved the users. These organisations also involved the users comprehensively in the
product testing. The case companies whose products was based on a technology push did also
have an extensive dialogue with the users. Their focus was though more on the continuous
dialogue through which they would gain input for their product development process, rather than
focusing on developing specific new ideas and concepts in cooperation with their users.
A general tendency was found when involving users, who are health care professionals. These
users are highly motivated by the opportunity to develop products that will improve their own
work when they consider the projects interesting and with potential. When involving users who
are of a good repute in their positions, or holding leading positions in hospitals, there is also an
incentive for them to participate related to being innovative and what this may bring in the form
of prestige and publicity. Other motivating factors included possibly benefitting from product
improvements free of charge, or monetary compensation when taking part in clinical trials.
Intellectual property rights, where appropriate, were though not shared with users and did not
form any incentives. Instead where products were protected by intellectual property, this was
used as protection for opening up to for instance the users.
When it comes to the distribution of intellectual property that may have been created during the
problem solving process, the majority of the case companies that experiences a high degree of
joint development with partners, also shared the intellectual property. This was done in different
ways though. For the companies who had themselves some patent protection on their product,
the rights were negotiated along the process, whereas the companies with no patent protection
did not interfere with any possible creation of patentable technology for their partners. The case
companies, who have patent protected products, but chose contract governed relationships,
instead, protected their intellectual property through the contracts and of course the intellectual
property rights themselves.
As a consequence of practising joint development with partners, the products also contain
components produced by partner companies. This is for instance the case for Nordisk Røntgen
Teknik, who has technology partners for the generating the x-ray beams and the picture
processing. Therefore, in addition to develop intellectual property rights, future sales was also a
major motivator for these external partner companies, combined with the possibility to improve
own product portfolio, and the learning involved in the joint development process. These
incentives were therefore relating to the problem solving process, the solution and also the
product life cycle after the product development. Contractual relationships in the competitive
market were governed by contracts, and the incentives were therefore much closer related to the
performance of the external source of knowledge.
When looking at the involvement of users there were two decisive factors influencing the extent
of communication, the willingness of the users to get involved and the extent to which the case
companies reached out and included the users. All companies but one did reach out to users on an
ongoing basis. Rhinix though only involved users in the clinical trials for the product testing, as the
fonder found it possible for him to evaluate the user experience himself.
Most companies experienced that the willingness to get involved was extensive among the users.
This may be due to the incentives for the users when getting involved in the product development
process as discussed above. A couple of companies seeking to involve staff and hospitals with
some level of prestige within their category, did though find that the dialogue would be limited to
few instances. They instead experienced having ongoing dialogues with different individuals
though belonging to the same user groups. Based on these observations it can be said that the
case companies wither have a dialogue with users and continuously adds additional new users as
they are found and show interest, or they may have a continuous focus on communication with
users, but moving from one set of users to the next.
With regards to users, the author of the thesis also find it relevant to mention, that the end-users
for the companies studied for most companies differ to some extent from the customers of the
products. This means that while the end-users may be a part of the decision making process when
buying this product they may not have the final say. There may also be more than one end-user
group. This complexity of more or less overlapping groups of users, consumers and decision-
makers can pose a challenge when including users in the developing process. While consumers
may also be one group of users for the companies, they are users when in the function of being
patients in one aspect or another, and are therefore part of a context including for instance
hospitals or emergency services. While the welfare of the patients is also considered important, as
the patients are also intended to benefit from the products, the primary handlers are not the
patients. For a full overview of customers and end-users please see the table in Appendix II.
When it comes to communicating with partners or companies engaged through contractually

governed market relationships, the communication patterns across the two governance forms
were not clearly distinguishable. While it is no surprise that the case companies reports having a
close and ongoing dialogue with the partners they practise joint development with, what does
contain an element of surprise is that the contractual relationships do for some of the companies
also foster an ongoing dialogue. When looking at the communication patterns, there is therefore
not a clear line between the two types of governance.
4.1.4 INTELLECTUAL PROPERTY RIGHTS AS A FACILITATOR FOR OUTBOUND INNOVATION AND INVESTMENT
Most of the cooperation across organisational boundaries described is inbound open innovation of
including external knowledge and skills from external sources in the product development
process. This is a clear tendency that is evident when evaluating the open innovation efforts
practised by the case companies. Only Health Equipment Denmark had focused on letting their
idea exit to the market through external parties and have licenced their product to big health care
companies, Roche, Gambro and Amgen. In addition to the licensing agreements Health Equipment
Denmark, as well as Medichanichal Engineering, have used their intellectual property rights for
signalling to potential investors when negotiating for investment.
While most of the case companies were very open to working with external sources of knowledge,
the intellectual property rights were by the companies, who held patents, also seen as a safeguard
when involving external parties. Health Equipment Denmark states that getting the patent gave
them the opportunity to go out to a wide selection of external sources without having to fear
misappropriation. Medichanical Engineering also used is as a protective measure, but at the same
time used the possibility for being open to talk to prestigious people in the hospital sector without
having them sign non-disclosure agreements, which was suspected to hinder the willingness of the
participants.
The companies not holding intellectual property rights were though not any less open. They just
did not consider it possible to protect their products or to be able to benefit from a product
protection. Hence, they were also actively engaging in open innovation and had very open
attitudes that for instance expressed themselves through stating that they happily share the way
in which they work and the knowledge they have and that giving opening up also leads to a larger
information and knowledge sharing.
4.1.5 SMALL COMPANIES

A final remark on the size of the case companies is relevant. Most companies mentioned that they
used their network of partners, advisors, market connections and users to leverage the small size
of the company. It was though also mentioned that being a small company could be an advantage
when approaching the users as this seemed to result in a high willingness to help. This was though
not based on an increased digitalisation making it easier to participate, but rather companies
finding that they experienced a greater willingness share knowledge with them being small
companies, as they experienced that helping the companies were experienced as helping the
individuals behind the company rather than a large entity, which can be difficult to empathise
with.
The digitalisation did though help the companies with regards to the many tools for
communication as well as product development, such as CAD and 3D printing. And while the
internet opens up for cooperating with external parties from all over the globe, local partners
were prioritised during the product development process if they could deliver the needed level of
quality. However, all companies were either aiming for international markets or international
partners in the long run, when the product development would reach a more mature stage.
While there does not seem to be any pattern according to any of the a priori defined sampling
criteria, the companies’ strategies for growth were though different. Some companies focused on
organic growth and keeping as much as the ownership of the company as possible in the hands of
the founder(s), whereas other companies actively sought investment through corporate venture
capital, government financed incubators, angel investors or seed capital. What the companies
have in common is though, that they have all received some form or another of soft funding,
money from regional developments funds, private foundations or government initiatives with no
specified returns.
5 DISCUSSION
Looking at the findings, it is obvious, that the case companies engage in complex boundary
structures with more than one governance choice. To reach these governance choices they do go
through the process laid out in the findings section. More or less implicitly the companies work
with structuring or assessing the complexity and decomposability of the problems that need
solving in their product development process, evaluating whether the needed knowledge and
competencies are held internally, and locating the knowledge internally as well as externally.
Assessing the complexity and decomposability of the problems at hand is important according to
Simon (1962), who argues that being able to decompose problems allows for solving simpler tasks
independently and then it will be the task of the focal organisation to gather these parts in the
product as a whole. Looking at the findings, it appeared that the companies with products arising
from a market pull had more decomposable products which they could then split up into smaller
parts solved in the market governed through contracts.
Possible explanations of this pattern could be that products arising from a market pull are just
simpler with less components affecting each other and therefore allowing for a greater
decomposition of the product into separable parts, or that companies developing products with an
offset in the market spend a greater effort on structuring the problems that arise in the product
development process. Simon (1973) also argued that most problems by nature are ill structured,
but that they can be structured to a smaller or larger extent when preparing to solve it. Therefore,
this pattern could also have arisen from a tendency among these companies of working with
structuring and defining the problems that are part of the product development process. Both of
these explanations are plausible and may both have contributed to the apparent pattern. The data
in this study does not shed any light on why the products arising out of market pull are more
decomposable and thus more studies are needed to uncover this.
Whatever reason may lie behind the products arisen out of a market pull being more
decomposable, these well-defined problems are suitable for market relations and thus the
majority of the companies follow the theory laid out by Felin & Zenger (2013). As mentioned only
one company went for the partnering governance choice practising joint product development
even though the products were initiated by a market pull and had a higher degree of
decomposability.
At the same time the findings show that products developed based on a technology push,
however, tended to be more complex and thus less decomposable than products emerging from a
market pull. The majority of the companies working with these problems thus also sought out
partners with whom they could lead a joint product development. The partnering governance
choice with its rich and ongoing communication and incentives tied closer to the process as well as
the solution, is according to Felin & Zenger (2013) a good match for solving complex problems.
This can be related to Henderson and Clark’s (1990) framework of component and architectural
innovation. When changes in components influence each other, we are dealing with architectural
innovation, which means working with the system as a whole rather than separating it into
separable parts not influencing each other. Again only one company separated itself in this
context by engaging in substantial joint development with the users and then alongside this user
involvement employed contract based relationships. Felin and Zenger (2013) also suggest the
cooperation with users as well as partnerships as ideal forms of open innovation governance
suitable for working with complex problems. It is therefore not inconsistent with their theories,
but simply a different combination than seen with the other companies in the study.
The case companies that separate themselves from the majority, when it comes to governance
choice are the two cases from the North Denmark med tech cluster. It is though hard to imagine
that the mechanisms of complexity should be different due to geographical location over such a
though relatively short distance. Therefore, this is not considered a function of geography but
rather a testament to the element of insecurity there is in concluding that companies working with
market pull products choose markets and tech push choose partners. The results are found to
indicate this, but there is a need for investigating this relationship closer to understand the
mechanisms leading to this tendency.
Having assessed the complexity of the products, the companies have some more or less structured
and decomposable problems they need to solve. Next the companies compare the skills needed to
solve the problems with the pool of knowledge and competencies held within the organisation.
This is a process that is done unconsciously as the findings revealed, that all the interviewees state
that they are well aware of which knowledge and competencies that are held within the company
and which are not, and to which level of quality the abilities will reach. This leaves the choice
between open and closed boundaries implicitly embedded in the competence profile of the
company.
When locating knowledge outside the focal organisation, Felin and Zenger (2013) pointed towards
markets and partnering as governance choices best suited for known loci of knowledge, whereas
tournaments and user involvement could involve both known as well as unknown loci of
knowledge. By ‘known’ Felin and Zenger (2013) also includes knowledge that is located within
practical amounts of search, and thus not rely on the sources to self-reveal and self-select into the
problem solving process. All case companies worked with known sources of knowledge, which
they either knew and were able to locate themselves or could locate trough simple internet
searches, or their extended network. None of the companies employed the governance choice of
contests tournaments and innovation platforms. From that it can be concluded that there seems
to be a barrier to employing this governance form. Reasons for this could be many. Maybe smaller
companies do not know of the existence of this possibility, they may lack the will to utilize this
exact governance form, they may not find that the problems they are dealing with would benefit
this kind of broadcast search or they may not wish to reveal which problems they are working on.
These reasons are though purely speculation, and further studies will have to investigate whether
any of these are valid or if yet other reasons may apply.
Some of the companies did though experience difficulties in the process of cooperating with
external sources. Using the organisation’s network and current partners may not lead to finding
the best match of partners for the problem or for the focal organisation. Additionally, a lack of
internal experience may also contribute to these difficulties. According to Cohen & Levinthal
(1990) organisations must have some prior knowledge on which they can build additional
knowledge and competencies, the organisation’s so-called absorptive capacity. Prior knowledge is
important because being able to connect the new knowledge gained to existing knowledge will
make it easier to understand and commercially exploit this knowledge, also having experience in
learning may ease future learning (Cohen & Levinthal, 1990). The level of prior related knowledge
consists of basic skills, shared language as well as scientific knowledge, and it is therefore not
difficult to imagine that it may be hard to deal with new knowledge if the employees in the
organisation have to learn new skills, a new vocabulary, or relate to a scientific field within which
they may only have very limited or no prior experience. Additionally, the fact that the companies
are relatively young could be an indication of not having a tremendous amount of prior knowledge
in the field and therefore making the learning a difficult process. Following Cohen and Levinthal’s
(1990) theory though, the learning should gradually become easier as the knowledge repositories
are built within the organisation.
Knudsen and Mortensen (2011) argued that the further away projects are from the company’s
core competencies, the higher the need will be for including knowledge from external parties. It is
though important to keep the comments on absorptive capacity in mind, as it may also become
more difficult to learn when moving away from the areas in which the organisation has extensive
knowledge and competencies. Knudsen and Mortensen (2011) also in their study found that that
new product development was neither faster nor cheaper when including external partners in the
process. The quality, however, appeared to be higher, although this was not enough to be deemed
so to a significant degree. They thus suggest that even though the innovation efficiency may not
be increased by using external sources of knowledge, there may be an increased effectiveness.
Comparing this to the above statement on absorptive capacity this indicates that working with
external sources of knowledge may be difficult as it demands for internal knowledge to build on.
However, in a continuous learning process the quality of the products and the product
development process could be increasing due to the continued learning, which was also stressed
by the case companies.
Both Laursen and Salter (2006) and Knudsen and Mortensen (2011) though stress that companies
can in fact be too open and over-search by working with too many external sources of knowledge.
While some companies did as mentioned have contact to a pool of external advisors, these
relations were though so shallow that they were not considered true external partners, and
therefore it was not assessed that any of the companies worked with enough external sources to
experience diminishing returns.
Felin and Zenger (2013) presented six governance choices and profiles of supporting instruments.
As mentioned previously the authority-based hierarchy and the use of contests, tournaments and
innovation platforms were not used by the companies in this study. The other four types of
governance were though relevant for the study. In large, the use of the governance forms were
consistent with the way Felin and Zenger (2013) presented them, only few additions are found in
this study.
With regards to contractual governed market based relationships Felin and Zenger (2013) suggest
that the communication and knowledge sharing is limited. In the study it was though found that
while the communication and knowledge sharing was more limited than that practised with
partner companies, the companies did experience an ongoing communication and knowledge
sharing with contractual partners too.
Another discrepancy found relating to the supporting instruments of the governance choice, is the
incentives in relations with partners. While there is surely a focus on the joint development
process not least through developing intellectual property, future sales also played a large role. As
several companies have end products, in which components are made by their partnering
companies, the partnering companies will benefit from the sales of the finished product. This
could lead to a focus not only on the process and the result hereof, but also on the life of the
finished product.
Finally, the governance choice of involving users is presented as ideal for solving complex
problems. This is also how they are used by the companies with complex problems. However, the
companies with simpler and more decomposable problems also involve the users to a large
extent. This is however not considered to be any issue as the users should be able to contribute to
problems of a higher as well as lower degree of complexity. The incentives for the users are highly
in agreement with facilitating the process of cooperation as suggested by Felin & Zenger, however,
more pay for performance like incentives were also used when the users were involved in clinical
trials. This may be a function of this specific industry, but could also be imagined in other
industries with stringent product testing processes.
Very similar to the literature, the large majority of open innovation efforts practised by the case
companies were focused on the so-called inbound open innovation efforts of including external
knowledge and skills in the product development process. As stated in the findings, only one
company actually employed outbound open innovation, and let their product exit to the market
through external parties under licence. It could be expected that it would be easiest for the
companies with patent protected products to take part in outbound open innovation as patented,
and therefore also well-described, technologies, are easier to understand and easier to put a
monetary value on (Alexy et al., 2009). This was also the case for the one company in this study,
however, it is not rigid enough data to make firm conclusions.
Also, in line though with Alexy et al. (2009) patents are used as signalling devices in addition to
product protection. This was, as mentioned in the findings, done by at least two of the case
companies in relation to obtaining financing from potential investors, namely Health Equipment
Denmark and Medichanical Engineering. Alexy et al. (2009) stress that intellectual property rights
can also be a potential facilitator of collaborative research and development activities. This may be
when secured intellectual property rights help the organisation to open up to external partners as
the rights can safeguard against misappropriation, because rights are more easily transferred
through licensing, and because patented technologies are thoroughly described and may
therefore be easier to understand and evaluate (Alexy et al., 2009). This was the case for the two
companies using their patents as signalling devices.
The case companies were specifically chosen to be small companies, to examine whether these
would have a similar pattern to what had been presented by Lakhani et al. (2013) and Felin and
Zenger (2013) in particular. As stated above, the use of governance choices and supporting
instruments were almost identical to that presented by Felin and Zenger (2013). However, not all
of the companies practiced clear closed innovation in addition to their open innovation efforts.
This may be due to the fact that small and medium sized companies are likely to have fewer
resources for innovation, in the form of smaller development budgets and fewer members of staff,
than large corporations and that it is therefore important to network with external actors as they
may be potential sources of knowledge as argued by van de Vrande et al. (2009). van de Vrande et
al. (2009) also stated that “SMEs need to heavily draw on their networks to find missing innovation
resources, and due to their smallness, they will be confronted with the boundaries of their
organisations rather sooner than later” (van de Vrande et al., 2009, p. 426). Therefore, the
companies in this study may be said to have a shrinking core and at the same time expanding their
periphery as argued by Gulati et al. (2012).
That the companies hit the limits of internally held knowledge sooner due to their small size, may
be a possible explanation for why they all practise inbound open innovation. However it is
important to keep in mind that this do not indicate that all small companies do reach out to
external sources of knowledge. That all companies in the sample do this may also be a function of
the sampling being done though a cluster organisation. Having been in contact with an external
advisor in the form of a cluster organisation, could indicate that the companies are open to
knowledge from external sources. However, it is reasonable to assume that companies practising
only closed innovation would not experience complex boundaries and mixed governance choices.
Companies are most likely characterised either by an authority-based hierarchy or a consensus-
based hierarchy, and it is therefore unlikely that these two governance choice co-occur. Therefore,
when investigating complex boundaries and the use of different governance choices
simultaneously, it will yield better results doing so on companies who either combine open and
closed innovation or different forms of open innovation.
As mentioned in the introduction it could be speculated that small companies with limited
portfolios or single product focuses may have difficulties decomposing and placing tasks on the
open to closed continuum, as they have limited experience with this activity. Or that they
alternatively may find it easier to assess core competencies and take stock of their internal
knowledge, which would result in them finding it easier to divide their activities and place them on
the open to closed continuum. Looking at the findings they do not point to companies having
difficulties in decomposing tasks due to their size. Rather, the complexity and decomposability
seemed to be influenced by the sampling categories technology push and market pull, although it
was not clarified why this was the case. Also, all the companies found that they had a good
overview of the knowledge held internally.
With regards to the second sampling dimension, the intellectual property, it did not seem to
influence the degree of openness or the attitude towards openness. The patens only in one case
was used to market the product through external channels, while the intellectual property rights
were though used as signalling devices and facilitators of open innovation. Bringing companies
into the study who have not patented their products did though add to the theory regarding
supporting instruments of governance choices laid out by Felin & Zenger (2013). This study
showed that removing the instrument intellectual property rights did not change the process or
choice of governance forms with regards to open innovation.
There has been a great focus on the increasing digitalisation as a contributing factor to problem
decomposability. This was a contributing factor in tasks that involve digital instruments such as
CAD and 3D printing were contributing factors to being able to decompose the problem. In
addition to that, digitalisation was also mentioned as aid in reaching more external sources of
knowledge external of the company. This, however, was only evident to a limited extent. While a
couple of the companies found external sources of knowledge through internet searches this was
not the primary lever of locating information, network also played a significant role. This was
especially clear as none of the companies in the study used the governance form of contest,
tournaments and innovation platforms, which are often carried out in a digital format.
Additionally, when users were involved it was not in the form of user communities but rather in
real life situations. Therefore, the digitalisation did not play a large role as a tool for reaching out
to unknown sources. However, it is very likely that the increased digitalisation have assisted in
easing the ongoing communication.
Digitalisation is also mentioned as a contributing factor for small and medium sized companies
increasingly entering the scene of open innovation by Gassmann et al. (2010) who argued that
especially companies that are born global tend to adopt open innovation and could therefore also
be described as born open. All the case companies are already or are aiming to sell on
international markets. Additionally, several of the companies are also working with or considering
foreign partners. Thus the theory of companies being on the global market also means being open
looks to be confirmed by this study. However, while Gassmann et al. (2010) describes it as being
born global and born open, this rather seems to be a process of being born open with global
ambitions. Several of the companies in their product development put emphasis on using local
partners to increase the control of the development and of the costs too, but being open to
international suppliers or producers for instance later in the process when the product
development were finalised.
That local partners are preferred in the product development context could indicate that tacit
knowledge is important in this process, and that all knowledge and competencies needed cannot
be made explicit and therefore transferred across great distances and disciplines (Howells, 2002;
Gertler, 2003). This could also be one reason for not utilising the digital platforms to a greater
extent in the search for external knowledge. Gertler (2003) also state that a common social
context is important for sharing tacit knowledge, which can be found through shared values,
language or culture. This was also backed by the findings, where it was seen that companies for
instance used their dealer network to gain an understanding of foreign markets.
6 CONCLUSION
This thesis was based on Lakhani et al. (2013) and Felin and Zenger’s (2013) research of how to
deal with innovation on a problem level, rather than an organisational level. Small med tech
companies were thus investigated to see whether patterns of problem decomposition and
governance choice similar to this previous research would appear, when applying it to this specific
context. Thus the problem investigated in the thesis were:

The problem statement had a dual focus. First, the aim was to investigate how small companies
deal with problem decomposability of their innovative products or product development process.
Secondly, the study sought to uncover how the companies dealt with making a governance choice
and deciding whether the problem should be solved internally or externally.
For the first of these two focus areas the study showed that the companies did try to structure
their problems thus making them decomposable to a greater or smaller extent, and that, when
possible, the products are decomposed into simpler problems that then can be dealt with
separately. A pattern emerged showing that products initiated by market pull had a higher degree
of decomposability and a lower degree of complexity than the products arising from a technology
push. It did however not uncover the underlying cause behind this trend, which makes it
interesting to see whether it would be possible to find a such cause and confirm the finding in
future research.
Felin and Zenger (2013) suggested that the ability to decompose problems may influence the
boundary decisions adopted by organisations. However, this study showed that not only did the
ability to decompose problems influence the choice of governance form, the origin of the product
idea or concept also appeared to influence the decomposability.
The study also confirmed that it is reasonable to change the discourse when discussing open
innovation from open and closed organisations to problems solved using complex boundaries and
a mix of governance choices places differently on the open to closed continuum as proposed by
Lakhani et al. (2013). All the case companies engaged in complex boundary structures with more
than one governance choice. To reach these governance choices they do went through a mostly
implicit process of structuring or assessing the complexity and decomposability of the problems
that need solving, evaluating whether the needed knowledge and competencies are held
internally, and locating the knowledge internally as well as externally.
The second focus on governance choice and open versus closed innovation confirmed most of the
guiding theory laid out by Felin and Zenger (2013). A few additions were made when it came to
the instruments used to support the different governance forms. The study uncovered that
contractual governed relationships were supported with an ongoing communication, just like
when entering into partnerships, alliances and corporate venture capital, rather than with limited
communication and knowledge sharing as proposed by Felin and Zenger (2013). For companies
that entered into partnering agreements, the study also found that incentives supporting the
process were complemented by incentives relating to future sales and thus a lot longer term than
just the development process. This came from the findings that when entering into joint
development partnerships, partners may deliver components of the finished products, and
therefore the product life cycle after the finished development were also a motivating factor,
though this will of course also strengthen the interest in a good development process.
Further, this study added the dimension of companies without product protection in the form of
patents on their products. Whereas Felin and Zenger (2013) considered intellectual property rights
one of the supporting instruments for governance, this study showed that removing this
instrument the governance choices were still following the same pattern as laid out by Felin and
Zenger (2013).
An interesting finding with regards to governance choice was though the fact that none of the
companies studied used contests, tournaments and innovation platforms or user communities, all
of which are often supported by digital platforms. This was surprising as the increasing
digitalisation had been predicted to be an assisting factor in the increased use of open innovation,
and particularly so for small and medium sized companies, and would therefore also be interesting
to further investigate.
Felin and Zenger (2013) encouraged to explore their framework and gain a better understanding
of the dynamics of the complex barriers, which has been done in this thesis. They propose that
some forms of governance may be more accessible or familiar to certain organizations which may
lead to certain governance choices. In this thesis it was proved that at least some governance
choices did not seem accessible to the small med tech companies, why the companies did not use
them at all.
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FINAL Master Thesis Thesis Thesis

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FINAL Master Thesis Thesis Thesis

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DECOMPOSING INNOVATIVE PRODUCTS AND CHOOSING THE

APPROPRIATE GOVERNANCE FORM FOR PROBLEM SOLVING

STUDENT : SUSANNE KOLLE

SUPERVISOR: CARSTEN BERGENHOLTZ

NUMBER OF CHARACTERS (NO SPACES ): 131.267

How do small companies divide their innovative products or product development

The problem investigated in thesis will therefore be:

2.1 OPEN INNOVATION

While Chesbrough introduced the term open

2.3 PROBLEM COMPLEXITY

FIGURE 2 – PROBLEM COMPLEXITY VS. PROBLEM DECOMPOSABILITY

2.4 LOCUS OF PROBLEM SOLVING KNOWLEDGE

Knowledge can be transferred interactively through cooperation or more passively through

2.5 GOVERNANCE CHOICES

2.5.1 INTELLECTUAL PROPERTY RIGHTS

FIGURE 3 – ILLUSTRATING THE TOP LEVEL RESEARCH PROCESS

3.1 CASE STUDY

3.3 DATA COLLECTION METHODS

3.4.1 THE INTERVIEW GUIDE

3.4.2 THE TECHNICAL ASPECTS OF INTERVIEWING

3.6 LIMITATIONS OF THE STUDY LIMITATIONS OF METHODOLOGY APPLIED IN THE STUDY

FIGURE 4 – PROCESS LEADING TO GOVERNANCE CHOICE ON PROBLEM LEVEL

4.1.1 THE PROBLEM STRUCTURE ’S INFLUENCE ON GOVERNANCE CHOICE

Working with a higher degree of decomposability allows the companies to go to a competitive

4.1.2 LOCUS OF KNOWLEDGE

4.1.3 USING THE SUPPORTIVE INSTRUMENTS

When it comes to communicating with partners or companies engaged through contractually

4.1.5 SMALL COMPANIES

How do small companies divide their innovative products or product

Simon, H. A. (1973). The structure of ill structured

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