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Value capture in hierarchically organized industries: The role of open source inputs

Value capture in hierarchically organized industries: The role of open source inputs. Joachim Henkel, Alexander Hoffmann. Open and User Innovation Workshop, Harvard Business School July 30, 2014. Nokia 770: Open source inputs. *Source: A. Jaaksi , presentation to LinuxWorld 2006.

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Value capture in hierarchically organized industries: The role of open source inputs

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  1. Value capture in hierarchically organized industries: The role of open source inputs Joachim Henkel, Alexander Hoffmann Open and User Innovation Workshop, Harvard Business School July 30, 2014

  2. Nokia 770: Open source inputs *Source: A. Jaaksi, presentation to LinuxWorld 2006

  3. Who appropriates the value that open source inputs contribute to complex, hierarchical systems?

  4. A hierarchically organized industry OEM 1st tier suppliers 2nd tier suppliers

  5. Negotiations The value split between industry participants is determined in negotiations. OEM negotiates with1st tier suppliers Each 1st tier suppliernegotiates with its2nd tier suppliers

  6. Bargaining structure and value split We show: Bargaining structure – who negotiates with whom – affects how the value is split.

  7. Model approach: • Hierarchical Shapley Value

  8. Hierarchical Shapley Value (1/3) • Idea: • Value split between level-1 (L1) modules according to Shapley Value • Value split within a given L1 module acc. to (modified) SV, assuming all other L1 modules are complete and present (reflects limited information) • Similar to Owen Value (1977), but different in important respect L1 modules L2 modules

  9. Hierarchical Shapley Value (2/3) • Set of L1 modules: , where, disjoint, and • Level-1 value distribution among L1 modules: • Induced characteristic function represents value of (complete) L1 modules and their unifications: • L1 Shapley value distribution: for

  10. Hierarchical Shapley Value (3/3) • Level-2 value distribution among modules within • L2 modules assume presence of all other L1 modules • Induced characteristic function (): • L2 Shapley Value distribution within an L1 module:

  11. Open Source Inputs

  12. OSS modules and value split What if one of the “participants” is an open source module? • Contributes to value creation • But: does not claim any value • Who appropriates the value contributed by the OSS module?

  13. Open source (OSS) modules Assumptions: • Contributors to the same subsystem as the OSS module are aware of it and use it in their negotiations • Contributors to other subsystems as the OSS module, or higher levels, are not aware of it and do not use it in their negotiation • “Information hiding” function of modularity (Baldwin and Clark, 2000)

  14. Results (1/2) System System A B&OSS OSS A B B OSS Value function , , , , , , , Since OSS is freely available, we assume that both A and B us it in their value proposition. B’s value capture acc. to Shapley: Hierarchical Shapley value: Split on 2nd level, within “B&OSS”: trivial, all value to B Split on 1st level: B captures…

  15. Results (2/2) System System A B&OSS OSS A B B OSS Through clustering with OSS module, B gains: , where denotes the “complementarity gains” of putting A and the OSS module together

  16. Conclusions • It is beneficial for firm B to be clustered with the OSS module (compared to a situation where A, B, and the OSS module are all on the top level) • How much B benefits from clustering, depends… • on the complementarity between A and the OSS module • but noton the complementarity between B and the OSS module • Logic: • Complementarity between B and OSS module benefits B in any case • The stronger the complementarity between A and OSS module, the more of the value added by OSS (incl. the complementarity gain) is claimed by A in case of no hierarchy, making hierarchy more attractive for B • Generalization of results to larger systems possible • Results extend literature (e.g., Lerner & Tirole 2002, West & Gallagher 2006) showing that complementary products are a way to benefit from OSS Thanks

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