OPEN INNOVATION 13
Running head: OPEN INNOVATION 1
Open Innovation
Student’s Name
Institutional Affiliation
The organizations that have used the open innovation strategy
LEGO Group Profile
The name ‘LEGO’ is an abbreviation of two Danish words ‘leg godt’, which means “play well”.In 1932, Ole Kirk Kristiansen founded the LEGO Group. Over time, the company has passed from father to son and is now under the ownership of Kjeld Kirk Kristiansen, a grandchild of the Group’s founder. LEGO is a private company incorporated in 1944 as Legetojsfabrikken LEGO Billund A/S. LEGO is involved in the development, production, marketing, and sale of play materials (Craft, 2019). The company develops the creativity of children through playing and learning. Some of its products include car toys, toys in airplane, boat, truck, construction, space, house, building, and robot categories. The company’s brand is more than a simple logo that is familiar to all. The brand symbolises the expectations that people have of the corporation towards the products and services that it provides and the accountability that the Group feels towards the surrounding world.
The company has six brand values including imagination, creativity, fun, learning, caring, and quality. Imagination is pegged on curiosity and the fact that it asks why and imagines possibilities of explanations (LEGO, 2019). Creativity, on the other hand, is the ability to create new ideas and new things that surprise and are of great value. The company embraces systematic creativity, which is the creativity that combines reasoning and logic with imagination and playfulness. What’s more, fun is the happiness individuals experience when they are deeply engaged in something that calls for mastery (LEGO, 2019). Learning is all about curiosity, experimentation, and collaboration. Caring involves the urge to make a positive difference in children’s lives, partners, colleagues, and the world. Lastly, the company believes in quality that speaks for itself. For the company, quality is the challenge to improve continuously.
Samsung Electronics Co., Ltd. Profile
Samsung engages in the manufacture and sale of electronic and computer peripherals. The company has three major divisions through which it operates including Consumer Electronics, Device Solutions, and Information Technology & Mobile Communications. Samsung was founded in 1969 and had its headquarters in Suwon, South Korea. The company was subsequently incorporated on August 8, 1973, under the laws of the Republic of Korea to manufacture and sell various electronic components (Markets Insider, 2019). The Company’s ordinary shares have been publicly traded on the Korea Exchange since 1979. Its manufacturing plants are situated in Suwon, Cheonan, and Ulsan. The overseas business operations of Samsung Electronics are maintained through 15 direct overseas subsidiaries and two indirect subsidiaries located in the Americas, Asia, and Europe.
Between 1987 and 1992, sales at Samsung Group grew more than 2.5 times. The Corporation drew from the potential gains in profits to be double its investments in research and development. This was part of the aggressive bid by Kun-Hee Lee to make the Company a leader in technology in the electronics, communications, and semiconductor industries. Samsung Electronics partnered with electronic firms in the US and Japan and also acquired companies that had crucial technology such as Integrated Telecom Technologies and Harris Microwave Semiconductors. The company, under the leadership of Kim Kwang-Ho, took the industry by surprise through the introduction of the 4-megabit DRAM chip in 1994 (Reference for Business, 2019). The rapid rise and technical advancements of the company have put it in the spotlight in the semiconductor industry. The multinational giant trades in the Seoul Stock Exchanges.
The effectiveness of their strategies
Organisational practices
LEGO Group
The success of LEGO is pegged on open innovation. In particular, open innovation and crow sourcing have much helped the company to reinvent the construction toys. The Lego Mindstorms is a perfect example that illustrates the “outside in” open innovation model whereby the corporation has enabled customers to come up with designs. In 2004, the company was amid a financial crisis as it was on the verge of bankruptcy. To survive, it realized that there was a need to enhance the efficacy of the processes involved in product development. This was the onset of open innovation at the company as it realized there was an untapped market in its adult customers. The idea of open innovation has recently been welcomed to be the new strategy in research and development (R&D) after the diversification in the demands of consumers (Jeon et al., 2015). Furthermore, open innovation is gaining relevance and importance as more and more consumers require responsive and continuous innovation.
Having recognised the need to take care of the needs of adult customers, Lego bosses saw the need to tap into the innovation of others. The aim of this decision was to avoid solely relying on its research and development department. The decision to embrace open innovation led to the successful launch of Mindstorm NXT. Much of the success of the company about the Mindstorm NXT was credited to the customers and fans of the company. Furthermore, LEGO introduced the Ambassador Program to provide a direct channel for its to 3access new ideas from the community. Also, a new platform called LEGO Cuusoo was launched to enable fans to upload their product designs directly. In case a design got more than 10,000 votes from the members of the community, LEGO would consider the design for possible production. Through this, the possibility that a new and innovative product by the company would have a mass appeal increased. By accessing customers through open innovation, LEGO tapped into certain benefits including gaining access to external expertise and knowledge, increased chances that customers would find a new product appealing and expansion in the LEGO play experience as it exposed the corporation to possibilities that had previously not been internally conceived.
Samsung Electronics Co., Ltd
Unlike its major competitor, Apple, Samsung is more open and active with regard to their efforts in strengthening the external innovative capability. The company has an Open Innovation Center (OIC), spearheaded by the OIC President, Marc Shedroff. The OIC, according to Shedroff, has four legs that outline how external innovators can partner with talented entrepreneurs (Lindegaard, 2014). The first leg is a partnership team, which thinks of the potential commercial partnerships between the company and third parties. The second leg is a ventures group involving R&D investments in startups. The third leg is the mergers and acquisition (M&A) team, which is concerned with the acquisition of smaller teams and fit them into the company’s innovation model. The fourth leg comprises accelerators, which have been opened in New York City and Palo Alto (Lindegaard, 2014).
The open innovation process involves taking a group of six personnel per team and giving them the benefits of a small company. The benefits include autonomy, freedom, and nimbleness to develop the product of their choice without passing through the approval process (Lindegaard, 2014). The teams are then provided with the benefits of big companies, which include widespread distribution, support financially, and other resources that are crucial for large firms. Additionally, Samsung Electronics has four modes of open innovation including traditional IP contract, the open innovation partnership, open innovation platform, and the open innovation community (Narsalay et al., 2017). The figure below illustrates the four modes and their roles in the company.
Figure: 1.0: The modes of open innovation at Samsung
Source: https://www.accenture.com/t20170220T002617__w__/ph-en/_acnmedia/PDF-43/Accenture-Open-Innovation-At-Samsung.pdf
The financial results of each company
Financial Ratios
Four financial ratios will be used to compare the performance of both Samsung Electronics and the LEGO Group.
Samsung Electronics
The quick ratio for Samsung Electronics was 1.71 in 2017 and 1.99 in 2018. These ratios are healthy and show that the company can easily meet its current obligations with the most liquid of its current assets. Therefore, it can be deduced that the decision to promote open innovation at Samsung has resulted in good financial health for the company through increased sales revenues. Secondly, the net profit margin ration for Samsung Electronics decreased from 17.26% in 2017 to 15.82% in 2018. The decrease in the net profit margin shows a reduction in the efficiency of the company’s management in terms of generating from unit sales. Subsequently, the company’s return on assets ratio decreased from 14.66% in 2017 to 12.03% in 2018. By implication, the firm’s effectiveness with regard to revenue generation from the available assets significantly reduced between 2017 and 2018. Moreover, the return on equity (ROE) at Samsung decreased from 21.02% to17.26% in 2017 and 2018. The result shows that the firm’s management was less efficient in generating unit revenue from the investors’ money.
Investments in startups through open innovation
In 2013, Samsung Electronics made a move aimed at making it one of the big heavy hitters in technology. It announced that it would commit to investments in new technology. The launch of the Samsung Strategy and Innovation Center (SSIC), as well as a total of $100 million committed to the Samsung Catalyst Fund, marked a new phase in open innovation at the company (Lawler, 2013). Furthermore, the company continuously invests $1 billion through its Venture Americas Fund and its existing research and development centres around the world. In 2017, Samsung announced that it would dedicate a total of $150 million to startups to provide more ammo for its business development program Samsung NEXT (Lawler, 2013). Samsung NEXT was previously known as the Global Innovation Center, and it currently fosters open innovation. The Korean tech giant uses Samsung NEXT for engagement from incubation, mentoring, and investment to partnerships and acquisitions. Previously, much of the innovation at Samsung happened in Korea. However, the company sees a major opportunity to find and capitalize on other global innovators. However, the realisation that it cannot go the innovative way alone makes Samsung consider the potential for open innovation. This began with the development of SSIC, which while based in Silicon Valley, would still tap into the other R&D centres around the world. Recently, Samsung was recognized as a champion of young corporations in Europe. The company has been investing more than $200 million to promote the growth of startups across the world through its open innovation initiatives. The Startup Europe Partnership (SEP) awards companies for their efforts to encourage innovation. Samsung ranked first in the highest award for its efforts in Open Innovation Approach to research and development. The collaboration between established companies and startups benefits both. As the more established companies get innovation and cultural change, the startups get resources and the necessary insight into the market to scale up.
LEGO Group
Firstly, the quick ratio at LEGO Group increased from 176 to 1.78 between 2017 and 2018 respectively. The increase in the ratio between the two years reflects good financial health for the company. Furthermore, it shows that the company has more than enough resources to promote its activities. The higher the quick ratio, the better for the company because it is in a good position to convert liquid assets into cash and settle obligations. Secondly, the company’s net profit margin ratio remained constant at 22% in 2017 and 2018. The management at the LEGO group always strives to ensure maximum efficiency in their operations. This is reflected in the company’s net profit margin ratio for 2017 and 2018, where the net profit margin was the same for the two years. Similarly, the return on assets ratio for the company was stagnant at 26%, further pointing toward the fact that LEGO Group is very concerned about efficiency. However, the ratio is relatively lower, which creates a need for more effective use of assets to generate revenue. Lastly, the return on equity ratio for LEGO Group was 38% in 2017 and 37% in 2017, which was a slight decline in the return that the group earned from the investment of owners. The consistency of this ratio further shows that the management of the company is seriously concerned about ensuring the efficiency in their operations. The higher the ROE, the better off the firm’s owner is.
Financial investment in open innovation
The company has invested a significant amount of its capital in promoting open innovation. To achieve strong, innovative capabilities, LEGO has implemented an open innovation strategy on both the production and process levels. The open innovation strategy at LEGO has focused on three major elements including; learning from internal practitioners through feedback, learning from external corporations, and building micro pilots (Elmansy, 2015). The innovation process is organized by splitting it into eight types including business model innovation and product development. LEGO Group has spent a significant portion of its resources on research and development activities. In 2017, it spent a total of 550 million Danish Krone. This figure increased, and the company spent a total of 822 million Danish Krone. The increased in the number of resources committed to R&D shows how much importance is placed on innovation every year. Every year, new product launches cater for about 60% of the Group’s sales. This margin clearly shows that revenue from innovation makes a significant portion of the company’s total revenues. More than 250 designers from more than 40 different countries form part of the creative core product development. The innovative activities that the company engages in that enable such an extensive extent of innovation include various initiatives from anthropological studies to trend spotting. What’s more, the Group is in partnership and cooperates with various educational institutions regarding various research projects. The company funds these research projects that include, among others, new technologies and children’s play. Overall, the LEGO Group is committed to including the entire society in its innovative initiatives.
Summary of the results in a table
Ratio
Samsung
LEGO Group
2017
2018
2017
2018
Quick ratio
1.71
1.99
1.76
1.78
Net profit margin
14.66%
12.03%
22%
22%
Return on assets
14.66
12.03
26%
26%
Return on equity
21.02%
17.26%
38%
37%
Investment in R&D
￦16,639,677
￦18,650,384
550mDKK
822mDKK
From the table above, it is clear that the two companies are working towards maintaining the managerial efficiency in their activities. First, the two companies are in very good financial health a can be seen from the quick ratio. Having taken care of inventories, the two companies can meet their current obligations using the most liquid assets. A quick ratio that is greater than one point towards a financially healthy company. In this regard, it can be deduced that the innovative efforts by the two companies are paying off, particularly in the case of LEGO Group where 60% of the total revenues come from activities associated with open innovation. However, it seems that LEGO Group earns more revenue per sales than Samsung as reflected in the two company’s net profit margins.
Subsequently, managerial efficiency is very high at LEGO Group in comparison to Samsung Electronics. This is shown by the high return on assets and return on equity ratios at both companies. However, the two ratios are higher at LEGO Group as compared to Samsung. This further points towards that LEGO management are more efficient in the use of resources to generate profitability. Moreover, it is clear from the table that both companies spend significant amounts of capital on research and development. It is evident that the business model of both Samsung Electronics and LEGO Group is built on innovation. This is why both companies invest millions of resources in research and development. Being in the high tech industries, the two must be innovative to continue being relevant and appealing to consumers.
Conclusion
In summary, it is worth reiterating that open innovation is an important part of today’s corporate environment. High tech companies such as Samsung and LEGO among others must embrace open innovation to succeed going forward. In open innovation, a company considers innovative efforts and inputs by members of society. Through this, the society feels included in the business and activities of the organization. The study has shown that both Samsung and LEGO Group are leaders in their respective industries, thanks to their efforts and determination to promote open innovation. The two companies have expanded their innovative capacities in different countries to be able to harness the creative efforts in such countries. Moreover, the two have had sound financial performance and high operational efficiency. In the LEGO Group, innovation contributes significantly to revenue and profitability, with close to 60% of the Groups revenues associated with products created through open innovation. Both companies have significantly invested in R&D activities and both are making progress in this respect. Samsung, for example, has been able to transform the smartphone experience through constant innovation while LEGO has transformed the toy experience for both children and adults. At LEGO, adults are given a chance to participate in open innovation, which gives them the chance to exploit their creative prowess. Overall, open innovation is fast transforming the corporate environment and companies are reaping massive benefits as a result.
References
Bughin, J., Chui, M., & Johnson, B. (2008). The next step in open innovation. The McKinsey Quarterly, 4(6), 1-8.
Craft. (2019). LEGO: Overview. Retrieved from https://craft.co/the-lego-group [Accessed: April 10, 2019].
Elmansy, R. (2015). Implementing Open Innovation to Drive Creativity inside Organizations.
Jeon, J. H., Kim, S. K., & Koh, J. H. (2015). Historical review on the patterns of open innovation at the national level: the case of the roman period. Journal of Open Innovation: Technology, Market, and Complexity, 1(2), 20.
Lawler, R. (2013). Samsung Launches Strategy and Innovation Center, will invest $1.1 billion on innovation through funds. Retrieved from https://techcrunch.com/2013/02/04/samsung- strategy-and-innovation-center/ [Accessed: April 10, 2019].
LEGO. (2019). About Us: The LEGO® Brand. Retrieved from https://www.lego.com/en- us/aboutus/lego-group/the_lego_brand [Accessed: April 10, 2019].
Lindegaard, S. (2014). 3 successful Open Innovation Cases: GE, Samsung, and LEGO. Retrieved from https://www.linkedin.com/pulse/20141115202453-46249-3-successful-open- innovation-cases-ge-samsung-and-lego/ [Accessed: April 10, 2019].
Markets Insider. (2019). Samsung – Profile. Retrieved from https://markets.businessinsider.com/stocks/samsung/company-profile [Accessed: April 10, 2019].
Narsalay, R., Brunswicker, S., Bagherzadeh, M., & Kim, J. (2017). Open Innovation at Samsung. Retrieved from https://www.accenture.com/t20170220T002617__w__/ph- en/_acnmedia/PDF-43/Accenture-Open-Innovation-At-Samsung.pdf [Accessed: April 10, 2019].
Reference for Business. (2019). Samsung Electronics Co., Ltd. Retrieved from https://www.referenceforbusiness.com/history2/16/Samsung-Electronics-Co-Ltd.html [Accessed: April 10, 2019].