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THE STRATEGIC MANAGEMENT OF INSTITUTIONS FOR VALUE CREATION: A STUDY OF HYBRID MODELS FOR SOFTWARE DEVELOPMENT Apart from a few exceptions, within the strategy discourse institutions have either been overlooked completely or they have been considered exogenously determined by governments or evolutionary paths. In the latter case, institutions represent a set of given variables that must be taken into (explicit or implicit) consideration during decision making processes. More seldom, however, is the analysis of firms’ active influence on institutional contexts, while we find some notable examples in unorthodox economics (North,1994; Nelson,1998). This paper contends that firms can design and manage institutional mechanisms strategically, not only to appropriate value, but also to enhance their capacity to create value. Amongst the typical institutional mechanisms used in capitalistic economic systems to motivate entrepreneurs and firms towards the intuition and execution of new resource combinations (i.e. to create value), the most notable are the various forms of intellectual property rights. Essentially, these mechanisms are aimed to motivate economic agents to create value for the society they belong to, by consenting that the success or failure of their endeavours influences them more than proportionately (Mises, 1966). In this respect, typical intellectual property rights are designed to enhance value appropriation from producer-centred innovation processes, while they were not designed to enable user-centred innovation processes. The central role accorded to producer-centred innovation is an (implicit) consequence of having viewed the innovation process in Schumpeterian linear terms. However, more recent studies have shown that the linear model of value creation is too simplistic. In particular, innovation emerges thanks to complex and iterative processes based on communication, learning and social interaction. Though these processes have traditionally been viewed as strictly internal to the firm, in fact a crucial role may be played also by agents that are present in various levels of the exogenous context. Amongst others, von Hippel (1976, 1988, 1994) shows that users/consumers often play a relevant creative role. Nonaka (1988), Dougherty (1992), Brown & Eisenhardt (1995) have argued that the capacity to internalize knowledge which consumers and the market behold can be of paramount importance for the creation of new rent streams, whilst other studies (Levin, 1988; Allen, 1983; Mergers & Nelson, 1994; Heller & Eisenberg, 1990) have shown the propulsive effect of inter-firm knowledge spillovers for value creation by firms. Thus, the interest matured lately in the formulation of open innovation models is not surprising (Chesborough, 2003; Tuomi, 2002). This study aims to add to our knowledge of how firms may actively design and strategically manage (both formal and informal) institutional mechanisms to access and leverage these dispersed sources of creativity, whilst maintaining the capacity to reap (at least a part of) the fruits of their innovations. The comparative analysis of anectdotical evidence from a number of case studies relative to the software industry, shows the presence of different models of innovation and production which coexist and compete against one another. Each one of these models is characterized by a specific institutional setting which determines its distinctive nature and the way in which the innovation and production of software occurs. In particular, the models identified include: (i) closed producer-oriented innovation processes, which occur within commercial software (or soft and harwadre) firms and rest on the definition of institutional mechanisms which consent high levels of value appropriation (i.e., closed- proprietary model); (ii) open user-centred innovation processes, which occur within open source communities of programmers (i.e., the open source model) and rests on institutional mechanisms which, by stimulating high levels of knowledge communication and open social interaction, facilitate value creation processes, but which, on the other hand, do not allow value appropriation from innovations; (iii) interactive producer-user innovation processes, in which firms actively collaborate with the external open source community on the development of specific software programmes. These “hybrid” models are activated by software (or soft and hardware) firms through the definition of entirely new institutional arrangements – i.e., new licenses, as well as other new formal and informal rules and regulations -, with the objective of enhancing the firm’s innovative capacity through the leverage of the creativity dispersed within the external environment, whilst maintaining the capacity to appropriate sufficient value from the firms’ activities. The analysis of the software industry proposed allows the illustration of the influence institutions play on the specific dynamics of the value creation process (and, given the nature of software programmes, also on the characteristics of the software obtained). Furthermore, it consents the scrutiny of some of the most interesting examples of firms experimenting with the design and management of new institutional settings aimed towards the strategic goal of leveraging the creativity dispersed within the external context.
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