Opening up for competitive advantage How Deutsche Telekom creates an open innovation ecosystem

Rohrbeck, R, Hlzle, K.. and H. G. Gemnden R&D Management,Vol. 39, No. 4, pp. 420-430, 2009 This is a preprint. Final article can be found at: http://www3.interscience.wiley.com/journal/122535414/abstract

Ren Rohrbeck1, Katharina Hlzle2, Hans Georg Gemnden3

rene.rohrbeck@telekom.de, Technical University of Berlin, Institute Deutsche Telekom Laboratories, Ernst-ReuterPlatz 7, 10587 Berlin, Germany. 2 katharina.hoelzle@tim.tu-berlin.de, Technical University of Berlin, Chair for Technology and Innovation Management, Strae des 17. Juni 135, 10623 Berlin, Germany 3 hans.gemuenden@tim.tu-berlin.de, Technical University of Berlin, Chair for Technology and Innovation Management, Strae des 17. Juni 135, 10623 Berlin, Germany
1

When on the 21st September 2006 The Economist compared incumbent telecommunication operators with dinosaurs that could soon face extinction, most readers were ready to agree. The mixture of declining revenues and fierce competition was believed to shake the market and soon to dethrone former national champions. However, there are ways to fight that extinction and one way is to open up for competitive advantage. This paper reflects on a case study at Deutsche Telekom, the German national telecommunication operator. The aim of this study is to analyse to what extent the open innovation paradigm has been embraced inside this now multinational company. Using empirical evidence from 15 in-depth interviews, we identify eleven open innovation instruments and detail their value contribution. We can show that Deutsche Telekom has successfully enhanced its innovation capacity by opening up its traditional development process and embracing external creativity and knowledge resources.

1. Introduction
Formerly, large multinational companies (MNC) used to have a quasi-monopoly on top researchers. They were the only ones capable of funding large-scale research programs and they operated dominating sales networks. Some multinational companies (MNC) still match the R&D spending of countries; the top 2 companies Ford ( 4.7 bn) and Pfizer ( 4.3 bn) exceed, for instance, the R&D spending of Sweden ( 4.2 bn) (Department of Trade and Industry UK (DTI), 2006). Today, this comfortable and dominant position of these large companies is threatened in most industries. Small companies use the Internet for selling their goods globally or for acquiring venture capital for their research. And, what might be even more alarming, these small companies are very attractive to top graduates, leaving the incumbent MNC with second best. Furthermore, many industries have become quite volatile and frequent changes force large incumbent companies to innovate and move into new business fields more rapidly in order to at least maintain their current revenue level.

One industry which is particularly known to have a recent history of important changes and disruptions is the telecommunications industry (Schlffer & Arnold, 2007). Only 13 years ago it was a monopolized business run almost exclusively by state-owned national enterprises. In the past few years this industry has faced dramatic transformations making it one of the most volatile industries overall. Three major disruptions have been the drivers behind this transformation (Laffont & Tirole, 2000): First, the liberalization of the telecommunications industry opened the markets to new competitors. This happened in Germany in 1995 and resulted in a reconfiguration of the marketplace, allowing new entrants to capture 52% of the overall market revenue by 2007. Moreover, the combination of price deregulation and enhanced competition led to a steady decline in margins, confronting the industry with a revenue decrease for the first time in 2006 and 2007 (Bundesnetzagentur, 2007). Second, the horizontalization of service architecture allowed small companies to offer services that used to be highly integrated vertical silos. An example for such a service is the voice call, which formerly required building and maintaining large networks. Today small software

Electronic copy available at: http://ssrn.com/abstract=1472157

developers, such as Skype, a Voice over Internet Protocol (VoIP) provider, can offer voice calls over the Internet with comparably negligible investment and operating costs (Pradayrol & Cyrot, 2008). Third, a shift in the value distribution in the industry is taking place. Formerly, the network operators were in a position to demand premium prices and earn high margins on their services. Today the threat is that the network operators might be reduced to mere bit-pipes and price premiums will be captured by the device manufactures such as Apple with the iPhone or the service providers (Spiegel et al., 2008). From the observation of such disruptive changes and the increased capability of small companies to compete on equal terms with large incumbent companies, Rupert Murdoch concluded that:
The world is changing very fast. Big will not beat small anymore. It will be the fast beating the slow.

This translates into a need for large companies to find ways to increase their ability to grow into new business fields fast and foster innovation in fields where they do not have any prior expertise. One way to do so is to open up the innovation process and use external resources and capabilities to boost the companys innovation capacity (Chesbrough, 2003b). By working cooperatively and competitively with other companies in order to co-evolve capabilities, to support new products, satisfy customer needs, and incorporate a new round of innovations, the company builds a business ecosystem (Moore, 1993). In the context of our study, this business ecosystem is therefore more specifically called an open innovation ecosystem. The prime example of a company that did exactly this is Apple. At a time when Apple had its back to the wall and was desperate to create the next blockbuster product, an independent product design consultant approached the company to propose an innovation consisting of an easyto-use MP3 player and music-management and purchase software (Kahney, 2004). This external idea was then taken up by Apple, a 35-member team hired from Philips, Ideo, Connectix and WebTV developed the design and user interface and a partner, PortalPlayer, developed the technical design. The final product was then produced together with Wolfson, Toshiba and Texas Instruments. And today the first-generation iPod is the most celebrated example of outstanding innovation in the electronic industry (Kahney, 2004). This successful example and the described need for increasing the innovation capacity through opening up the innovation leads to our main research question: To what extent can the open innovation paradigm be embraced by a large incumbent company whose needs are particularly high?

such as spin-in, spin-outs, outsourcing R&D, technology in-sourcing (Chesbrough, 2003a; Chesbrough, 2003c; Chesbrough, 2006; Gwynne, 2007), user integration kits (Piller & Walcher, 2006) and open innovation platforms, such as Procter & Gambles Connect & Develop (Dodgson et al., 2006; Huston & Sakkab, 2006). Further research has looked at understanding the underlying motivation of firms engaging in open innovation and how the individual employee can be stimulated to participate in an open innovation process (Henkel, 2006; West & Gallagher, 2006). Today, the first quantitative research results are starting to appear (Lichtenthaler, 2008b) and the first evidence shows that even companies outside high-tech industries are adopting open innovation instruments (Chesbrough & Crowther, 2006). Moreover, the usage of open innovation instruments is expected to increase dramatically over the next few years (Gassmann & Enkel, 2006; Howells, 2008), What has been missing so far is an overall analysis of an entire company to assess to what extent the open innovation paradigm is embraced.

Research Strategy
In order to assess the degree and extent of the usage of open innovation in a company, this study uses a single case-study design. Case-study research is recommended if the knowledge in a research area is limited. In such a research setting, gathering rich information is expected to help identify new aspects and new phenomenon (Eisenhardt, 1989; Yin, 2003). Single case studies are particularly powerful in exploring a phenomenon in its context while retaining the richness of the studied incident and its context (Eisenhardt & Graebner, 2007). In order to identify how open innovation instruments are used in a specific setting, we had to gain access to a large sample of respondents within the target company Deutsche Telekom. Additionally, four respondents from a partner network of the company were also included, allowing us to further triangulate the data and to bring in an external perspective. The full sample of respondents is given in Table 1. The interviews have been exploratory and semistructured. Questions asked in most interviews included: What open innovation activities are you involved in? What open innovation activities are you aware of? What value creation do you expect and have experienced from open innovation activities? What are the major barriers to open innovation in your company? What are the major drivers for open innovation in your company? The respondents were encouraged to describe the different open innovation activities thoroughly. The unguided descriptions were then often followed up by closed questions in order to validate the given information and explore further aspects. All interviews have been recorded and transcribed. The NVIVO software was used to support the coding of the transcriptions and the following analysis of the different

2. Methodology Research gap

The research on open innovation has been initiated by conceptual work (Berkhout et al., 2006; Chesbrough, 2003b; von Hippel & von Krogh, 2006) and some first case studieshighlighting open innovation instruments

Electronic copy available at: http://ssrn.com/abstract=1472157

open innovation instruments.

Company
Deutsche Telekom Deutsche Telekom Deutsche Telekom Deutsche Telekom Deutsche Telekom Deutsche Telekom Deutsche Telekom Deutsche Telekom Deutsche Telekom Deutsche Telekom Qiro EICT EICT Siemens Infineon

Entity
T-Labs T-Labs T-Labs T-Labs T-Labs T-Labs Product House Product House T-Mobile T-Venture Start-up

Position
VP Head of innovation development VP Co-Head of innovation development SM Project field coordinator Researcher Project field coordinator Researcher SM Head of business innovation SM project manager Helios VP category manager Mobile Internet M Investment fund manager Founder and CTO CEO Head of Project Management

Topics
Identification of activities T-Labs Consortia projects User driven innovation User driven innovation T-City Collaborative R&D Helios Creation Center Spin-outs, spin-ins Spin-outs Industry collaborations Industry collaborations Industry collaborations Collaborative foresight

Perspective
Instrument responsible Instrument responsible Instrument responsible Instrument team Instrument responsible Instrument team Instrument responsible Instrument responsible Instrument team Instrument team Instrument team Partner Partner Partner Partner

Corporate Technology Corporate function

Head of professional speech processing Director account & marketing strategy

Table 1

Respondents and perspectives

3. Findings
When mapping open innovation instruments within large companies the first choice to be made is what to include and what to exclude from the analysis. This problem is best illustrated by the comment of the vice president and head of innovation development of Deutsche Telekom Laboratories (T-Labs), the corporate R&D unit:
The more I think about it [open innovation], the more I realize that such a large corporation [Deutsche Telekom] has an endless number of relevant contacts with outside innovation!

This holds particularly true for a service company such as Deutsche Telekom. As a telecommunications company, Deutsche Telekom has to operate other companies innovations. Most innovative products and services are based on innovations from its suppliers such as AlcatelLucent, Ericsson or Nokia Siemens Networks. In consequence, the same respondent pointed out that most innovations visible to the customer are brought into the company by the product managers. As these innovations cannot be considered as innovations from Deutsche Telekom but rather as from the supplier, they have not been considered in the analysis. Consequently, the focus of this study was the identification of those open innovation instruments that are used to create company-specific innovations. These include differentiating features that are implemented in addition to the suppliers products as well as innovative products and services developed entirely at Deutsche Telekom.

3.1. Open innovation instruments

For classification of the instruments used at Deutsche Telekom we differentiate between four categories that follow the innovation process stages at Deutsche Telekom. Idea generation: Including any sources and activities that contribute to the development of a new innovation. Research: Instruments directed at facilitating research collaboration or in-sourcing of technologies. Development: Activities aimed at engaging with partners in the creation of new products or new services. Commercialization: Activities that engage with outside partners to bring technologies or products/ services to market. A second differentiation is made along the core process archetypes introduced by Gassmann and Enkel (2004). They identified three types of open innovation processes: The outside-in process, where external knowledge or resources are brought into the company, the inside-out process, where internal knowledge or R&D results are transferred to the outside for commercialization and the coupled process, where inside-out and outside-in processes are combined and partners share complementary resources. By combining these two dimensions, a total of eleven instruments could be identified at Deutsche Telekom. They are shown in Table 2. With respect to the innovation process phases we see a balanced portfolio. Five instruments contribute to the idea-generation phase, five to research, six to development and five to the commercialization phase. In terms of the core process type, a slight emphasis is put on the outside-in process. This is not surprising as Deutsche Telekom is a service company and focuses on the last step in the telecommunications value chain and

thus has a natural inflow of information from its suppliers. Activities characterized as inside-out are limited to the commercialization phase, where R&D results are spun-out with the help of other investors or brought into test markets such as T-City. Coupled processes occur exclusively when interacting

within established partnerships. Two instruments foresight workshops and executive forums are used for information gathering and two other joined development and strategic alliances for development of products together with partners.

Instrument

Identified examples

Description

Innovation Process Phase

IG R D

Core process type

C IO OI C

Foresight workshops Executive Forums Customer integration Endowed chairs Consortia projects Corporate Venture Capitalist Internet platforms Joined development Strategic alliances Spin-outs Test market

Infineon, Nokia-Siemens-Networks Feldafinger Kreis, Mnchner Kreis, IT-summit of the government User clinics, Creation Center of T-Mobile, Day-in-the-life-visits Chairs at T-Labs and Post-Doctoral Researchers National projects: ScaleNet; EU projects: Moby Dick, Daidalos, T-Venture www.developers.telekom.de, www.BetaBuzz.de Product House Product House Qiro, Zimory T-City

Workshops where potential of innovations and emerging technologies are discussed Symposia where strategic innovations are identified and discussed across companies and industries Aimed at sourcing external creativity from customers, other industries, artists, etc. Opening the door to the academic world bringing in state-of-the-art knowledge Cost sharing of complex research projects, mostly in pre-competitive fields Window to innovation in the start-up community and technology sourcing through co-investing Involving users and developers in Web service creation and evaluation Collaborations along the value chain, targeted at a certain product or market Cross-industry or along the value chain alliances, for a certain time typically targeted at multiple products External commercialization of internal R&D results: technologies, products or services Equipping a city of 100,000 inhabitants with nextgeneration ICT infrastructure

Table 2: Open innovation instruments at Deutsche Telekom

3.2. Mapping the open innovation ecosystem

As stated before, all open innovation activities of a company and its partners take place in an open innovation ecosystem. The open innovation ecosystem for Deutsche Telecom is described by the activities along the innovation process, the intensity they are pursued with, and the drivers of the activities. The intensity is used as a proxy because the values of moreobjective measures like budget, internal resources or time could not be obtained. The matrix was developed on the basis of the qualitative interviews and then validated by two respondents who had an overview over all instruments. The result is shown in Figure 1. It shows which open innovation instruments have played an important role within Deutsche Telekom so far and what effort is involved to make an open innovation ecosystem work. However, the interpretation of this matrix should be made with care bearing in mind the evolution of the matrix. What can be observed is that most effort is being put into the research and

development phase. This finding confirms the initial hypothesis of Chesbrough that companies engaging in open innovation are primarily seeking to share cost and risk in research and in-source knowledge and technology for new product development (Chesbrough, 2003b).

Figure 1: Open innovation ecosystem at Deutsche Telekom

As most resources are spent within research and development phase, we are discussing these two first and then focus on the idea generation and commercialization phase. Within the research phase university-industry collaborations based on technology transfer or endowed chairs are the most traditional way of interacting with the academic world (Siegel, 2003). A more novel way of organizing the industry-university interface is represented by T-Labs, a UniversityIndustry Research Centre. Within T-Labs four endowed chairs, over 80 post-doctoral researchers and over 100 Deutsche Telekom employees are working on technology- and customer-driven innovation. Providing an own organizational structure for academics and corporate R&D personnel allows to overcome many barriers associated with university-industry collaborations (Rohrbeck & Arnold, 2006). In addition to the joined research activities the postdoctoral researchers who typically retain strong links to their home universities are perceived as a good way to access the worldwide R&D community. Through their informal networks they are able to validate the state-of-the-art of ongoing research activities in an effective manner. In addition their link to their former university is strengthened by a program in which the TLabs researcher can finance a PhD student at his former chair. For development work where the most R&D budget is spent open innovation is believed to be a particularly powerful tool to enlarge the resource base of a company. Instruments active in the development

phase should give access to knowledge, pool complementary resources and build R&D networks (Miotti & Sachwald, 2003). As R&D networks are expected to become bigger in the future (Lichtenthaler & Lichtenthaler, 2004), it becomes even more important for companies to increase their own networking effort. These networks need to be managed proactively and with a strategic intention in mind. Hence, Deutsche Telekom has founded the European Center for Information and Communication Technology (EICT) as an intermediate that facilitates joint research programs within a network of preferred partners (Bub & Schlffer, 2008). The founding partners were Daimler AG, the automotive company, Siemens AG, the telecommunications and electronics company, the Technical University of Berlin, and three Fraunhofer Institutes for applied research. Through this organization Deutsche Telekom organizes consortia projects as well as bilateral development projects. One example of a successful development project is the speech-based classifier that was developed together with Siemens and four other partners. This project was started through an informal contact of the CEO of EICT to a former colleague at Siemens Corporate Technologies. The additional four partners were brought in to complement the skill set of Deutsche Telekom and Siemens. The product developed within the project recently won an award at the Voice Days, a conference in the field of voice services, and has been implemented by T-Mobile in their customer-service hotlines.

Another example of using the power of networks to support the open innovation principle is the use of internet platforms as a mean to support and foster the interaction with partners and especially software developers in the development phase. The open development platform developer.telekom.de opens up existing API (application programming interface) services and provides software developers with the possibility to integrate these services in their own applications and mash-ups. Here, Deutsche Telekom expects an increased market reach of their applications generating new additional revenue streams. Additionally, the customer retention and new additional revenue streams are expected through an enriched consumer application portfolio Before the research phase can start, ideas need to be created or added to existing knowledge in the idea generation phase. Here, the value creation of integrating external sources is almost the highest (Gruner, 2000; Song, 2006). Integrating users even beyond the ideation phase has been discussed for quite some time now. Von Hippel documented that innovative users are creating new products themselves if they are not satisfied with current solutions (von Hippel, 1986). The major advantage they have compared to a manufacturing company is that they possess so-called sticky knowledge (von Hippel, 1998). Such knowledge includes context information on how products or services are used and what limitations exist in the available product. In some cases these users might be inclined to reveal this information (von Hippel & von Krogh, 2006), and thus contribute to industrys innovation management (Lettl et al., 2006). But there are also certain risks associated with customer integration (Enkel et al., 2005), including high cost, problems identifying suitable customers or opportunistic customer behaviour (Alam, 2006; Brockhoff, 2003; Campbell & Cooper, 1999; Jeppesen, 2005). At Deutsche Telekom, T-Labs collects customer insights using ethnographic methods (Rosenthal & Capper, 2006) such as empathic design (Leonard & Rayport, 1997) or day-in-the-life-visits (Mrazek et al., 1995). Both methods are based on observing the customers in their own environment in order to get a deep, empathic understanding of unarticulated user needs which the user themselves might not be aware of (Leonard & Rayport, 1997). As an example of applying the day-in-the-life-visit method, T-Labs recruited six families that differed in family structure so that within the small sample every family would add a different perspective to the topic. It was decided to do a user shadowing for the duration of one and a half days in order to get a vivid imagination of the families lives including an interview at the end of the visit. Subsequent to the observations the team sat together to review the photos and notes they had taken. A choice of 50-80 photos was made and three key findings picked in order to introduce the family to the rest of the project team. All ideas were collected and refined into concepts. During the process a long list of approx. 100

ideas were collected that were clustered and refined into approx. 30 illustrated concepts. A second customer insight tool which is used by TLabs is user clinics. In these clinics, the customer is confronted with prototypes and later asked for preferred sets of features. Using conjoint analysis a preferred product design can be combined from all respondents. An additional benefit is the interactive process that allows collecting further rich data on customer preferences. For exploring strategic innovation areas in the first phase of the innovation process, Deutsche Telekom is participating in executive forums such as the Mnchner Kreis or the Feldafinger Kreis. Both are forums that bring together executives and academics in a crossindustry panel and facilitate discussions about topics such as digital rights management or the future of the Internet. In addition there are also governmentsponsored activities such as the IT-Gipfel der Bundesregierung (IT-summit of the German government), where the CEOs of the largest companies in Germany and leading academics discuss and kick-off large-scale innovation activities. In the idea-generation phase the foresight workshops also play an interesting role: While traditionally the knowledge about future directions of technological developments were regarded as highly valuable and thus dealt with a maximum level of secrecy, Deutsche Telekom engages with selected partners in joint workshops where this knowledge is shared. This is particularly surprising because Deutsche Telekom is operating a worldwide network of technology scouts (Rohrbeck, 2007) and it could be expected that this effort would be exploited by keeping this information secret and using it exclusively. In the commercialization phase, technologies and products that can or have not been transferred to business units because of internal barriers might be commercialized externally (Chesbrough, 2003a; Lichtenthaler, 2008a; Lichtenthaler & Ernst, 2007). Such activities have for example been reported at DSM, a Dutch chemical company (Vanhaverbeke & Peeters, 2005) and can also be found at Deutsche Telekom. At T-Labs, the first two examples of spin-out companies could be observed: Qiro and Zimory. Both spin-out companies are developing technology that is close to existing business, but fits only weakly into current innovation strategies. They are financed by external seed capital. Zimory also received financing from T-Venture, the corporate venture capitalist arm of Deutsche Telekom. In reference to the possibility that these companies might later be bought back, they are called Spin-Alongs (Rohrbeck et al., 2008). Another instrument of open innovation is supporting the commercialization phase: Deutsche Telekom runs a large test market to promote collaborative innovation. In 2007 Deutsche Telekom chose Friedrichshafen, a German City of 58,700 inhabitants to become T-City, a national showcase for new information and communication technologies (ICT). The person responsible for T-City at T-Labs explains that:
The idea behind T-City is to show that it is

possible to enhance quality of life through information and communication technology.

Here, 40 - 50 Mio Euros will be invested in infrastructure and additional 80 Mio Euros will be spent on projects developing new products and services. These projects are defined together with other companies, such as Alcatel-Lucent, a telecommunications supplier, or ZF Friedrichshafen, an automobile supplier, together with the public administration as well as community groups. Running a test market at such a scale also yields the benefit that even large innovations such as e-government applications, mobile worker solutions or e-health schemes can be applied and tested in a real-world environment.

customer integration and research partners cooperation, T-Labs has reached a lighthouse position for the whole organization with respect to activities with these innovation partners. For the last three years, TLabs has consistently shown a strong innovative capacity as more than 30 already successful finished projects and more than 70 running projects in 2008 showof these projects over 70% have been in collaboration with academic partners. Overall Deutsche Telekom can be characterized as a company that has successfully opened a large gate to the outside world, without tearing down every wall and opening every door. By doing so Deutsche Telekom uses most of the benefits of open innovation without betting its survival on an open innovation future.

4. Conclusion References
This study was aimed at assessing the degree to which the open innovation paradigm has been adopted by a large multinational company. We were able to identify eleven open innovation instruments and shed light on their aims and value contributions. Taking into account that in a company of 240,000 employees, a sample of 15 respondents will not be sufficient to identify all open innovation activities, the number and intensity of open innovation activities is surprisingly extensive. When considering the overall innovation management system of Deutsche Telekom, with around 6,400 employees identified in the annual report as working in R&D plus an unknown number of employees working in functions such as marketing, the number of people associated with open innovation activities remains limited. Through our interviews we estimate the number of employees with frequent interactions with the outside world to be less than 10%. Here, the future innovation strategy of the company which is currently being re-defined will put a special emphasis on. Right now, the opening of the innovation system is highest in the area where it can be expected to matter most: corporate R&D. The R&D in the business units (T-Mobile, mobile services, T-Home, fixed telephony and broadband access and T-Systems, business customers and ICT services) has traditionally focused on applied research and development, mostly based on innovations brought in from suppliers. Therefore, the competitiveness of innovations on the business-unit level is based on procurement rather than on the internal innovation capacity. Here, the open innovation ecosystem needs to be enlarged in order to include these decentralized business units. One example is the joint development with suppliers in various fields. The founding of EICT as an intermediate for such joint projects certainly helps to facilitate activities in this field. Another strong driver of open innovation activities are the T-Labs. Throughout the study various examples have been identified which documented that the open innovation instruments are applied very effectively in this corporate R&D unit. Especially in terms of
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