Chapter 19
Open innovation
Historically, most firms have treated innovation as a highly proprietary activity – they have kept their development projects secret and filed lots of patents to protect their intellectual property. Today, the buzzwords are ‘open innovation’ – which is about using ideas and people from outside your firm’s boundaries to help you develop new products and technologies, as well as sharing your own technologies with external parties on a selective basis.
When to use it
- To help you develop new products and services more quickly.
- To tap into opportunities and ideas outside your firm’s boundaries.
- To commercialise ideas and intellectual property you have no use for.
Origins
As with many hot ideas, the concept of open innovation seems very modern, but has a long history. One useful starting point is the famous Longitude Prize that was offered by the British Government in 1714 to the inventor who could come up with a way of measuring the longitude of a ship at sea. The prize ultimately was won by John Harrison, a little-known clockmaker, who invented the first reliable maritime chronometer. Rather than just hire the smartest engineers and ask them to solve the problem, the British Government opened the problem up to the masses, and the outcome was successful.
Large firms have used formal R&D labs for about 100 years, and these have always had some degree of openness to external sources of ideas. However, the approach changed significantly during the 1980s and 1990s, partly because of the exponential growth in the amount of scientific knowledge produced during this era and partly because of the emergence of the internet, which made sharing over large distances much easier. Through this period, firms experimented with a variety of new approaches to innovation, including corporate venturing, strategic alliances with competitors, in-licensing of technology, innovation competitions and innovation jams.
Berkeley professor Hank Chesbrough provided a useful way of pulling these various models together through his book, Open Innovation, published in 2003. Since then, studies of open innovation have proliferated and many different angles have been explored, both practical and theoretical. New approaches to open innovation are emerging all the time. For example, a recent idea is ‘crowdfunding’ – where an individual might seek financing for an entrepreneurial venture from a ‘crowd’ of backers through an online platform.
What it is
In a world where knowledge is distributed widely, companies need to find ways of tapping into that knowledge if they are to out-innovate their competitors. This can be done through any number of different mechanisms, including acquisitions, joint ventures, alliances and in-licensing, as well as more recent innovations such as crowdsourcing and crowdfunding. Companies also need to use external partners to help them commercialise their own ideas – for example, via out-licensing or by creating spin-out ventures.
The basis of an open innovation strategy, in other words, is a network of relationships with external partners who work collaboratively to develop innovative new products and services. However, it should also be clear that this approach requires a significant shift in mind-set and management approach, because companies rarely have exclusive intellectual property rights over innovations developed in partnership with others. In the traditional ‘closed innovation’ world, companies generated competitive advantage by protecting their intellectual property; in an ‘open innovation’ world, competitive advantage is likely to accrue to those companies who collaborate best, or who are fastest to move into new opportunities.
Most large companies, especially those working in high-tech sectors such as information technology and life sciences, have now embraced the principle of open innovation. This trend has been driven by a number of factors, including the exponential growth in the amount of scientific knowledge in the world, the availability of external partners and venture capital funding and the ease of sharing ideas through internet-mediated platforms.
How to use it
Open innovation is a high-level concept, so it is used through a number of different tools and methodologies. Here are some of the more popular ones:
- Customer immersion: This involves working intensively with customers and prospective customers – for example, to get their input into proposed new products or to get them to help design new products themselves.
- Crowdfunding: This uses a platform (such as Kickstarter) so that an individual can suggest an idea they want to work on, and other individuals and firms can then invest some seed money to get it started. In this case, the ‘open’ part of the process is about gaining access to money, rather than gaining access to people or technologies.
- Idea competitions: This involves inviting large numbers of people (both inside the firm and outside) to take part in a competition to come up with new ideas. Sometimes these are managed through online forums, such as IBM’s celebrated ‘innovation jams’; sometimes they are in-person ‘trade shows’, where people showcase their ideas to their colleagues. These and related models provide the company with inexpensive access to a large quantity of innovative ideas.
- Innovation networks: Many companies seek to get sustained access to pools of expertise outside their boundaries by creating innovation networks. For example, in the IT industry, software developers may be invited to join developer networks to help identify and fix problems, often with financial rewards available. Lego has a parallel model with its communities of lead users, who get involved in designing and improving new Lego products before they are released.
- Product platforms: This involves the company introducing a partially completed product, or platform, on which contributors can then build additional applications or features. Because they bring many different ideas and skills to the development process, these contributors are typically able to extend the platform’s functionality and appeal in ways the company would not have thought of.
This list of approaches is not comprehensive. For example, it excludes many of the more well-established approaches to open innovation, such as in-licensing, corporate venturing and strategic alliances. Moreover, new approaches to open innovation are emerging all the time.
Top practical tips
A key shift in mind-set is required to make open innovation work, because the firm no longer owns or controls its ideas in the way that it did before. Of course, there are some industries, such as pharmaceuticals, where patents are still highly important. But in increasing numbers of industries, the underlying technology is either shared between firms or is made available for everyone to use through a public licence (such as the contents of Wikipedia or the Linux software platform). In such cases, firms create commercial value either through the speed of bringing a technology to market, or by combining freely available technologies in new ways, or by selling proprietary services on top of open technologies.
Another part of the shift in mind-set is that you cannot expect to tap into ideas from external sources without also being open to sharing your own ideas. Working in an open innovation environment requires trust and reciprocity between individuals, and a highly secretive attitude will quickly be picked up by the people with whom you are dealing.
Top pitfalls
Many firms have experimented with the concept of open innovation by creating some sort of idea scheme, where they ask people inside the firm (and sometimes people outside as well) to come up with suggestions for improvements. There are two big mistakes you can make with such a process. One is to ask a really open-ended question, such as ‘How can we make our firm a better place to work?’, because it will yield all sorts of random ideas, such as more salads in the canteen or a pet care facility. You need to ensure that the questions you ask are sufficiently targeted that you get relevant and practical answers. The second pitfall is to create such a scheme without the resources you need to read, filter and act on the ideas that are proposed. Without such resources, the scheme often gets overloaded and the ideas get ignored, resulting in disappointment and cynicism among those who got involved.
Further reading
Chesbrough, H.W. (2003) Open Innovation: The new imperative for creating and profiting from technology. Boston, MA: Harvard Business Press.
Chesbrough, H.W., Vanhaverbeke, W. and West, J. (eds) (2006) Open Innovation: Researching a new paradigm. Oxford, UK: Oxford University Press.
West, J. and Bogers, M. (2013) ‘Leveraging external sources of innovation: A review of research on open innovation’, Journal of Product Innovation Management, 31(4): 814–831.