Principles of open innovation

What do mini-Big Bang Theory Lego, Mozilla, Facebook’s Pride Flag feature, P&G’s Connect+Develop, and Moodle have in common?

There are all examples of open innovation (OI) at its best.

Popularized by Henry Chesbrough,“Open Innovation” term refers to the broad concepts of leveraging external sources of technology and innovation to drive internal growth. It also entails the spin-off and outsourcing of unused intellectual property. (Michael Docherty, 2006)

As opposed to traditional closed models where companies use primarily internal resources to drive innovation, in the newer open models, knowledge crosses an organization’s boundary for commercialization in new or existing markets. Mergers and acquisitions, licensing-in, strategic alliances, joint R&D, and user involvement are examples of inbound open innovation. And spin-off, open sourcing, and licensing-out are instances of outbound open innovation. Research shows that coupling both modes seems to be best to enhance a firm’s performance.

Let’s take a closer look at the principles of open innovation according to Chesbrough (2003).

Comprasion between open innovation and closed innovation

Smart people outside the company have much to offer

Bright, enterprising minds could be your competitor’s employee! So, what do you do? You rethink the way you generate ideas or take them to market. Considering ideas from everywhere will open alternative routes to innovation. Exchanging thoughts, ideas and opinions top-down, inside-out, etc. will boost value creation. Innovation can come from anywhere (that’s how Google innovates).

Ideation is not the purview of a few blessed individuals in companies that embrace open innovation. For example, Procter & Gamble’s Connect+Develop program generates billions of dollars in revenue and over 35% of its innovations. The company, which itself began as an innovative partnership, engages with individuals and businesses to access external capabilities, technologies, products, and opportunities and facilitate innovation. (Read more in this HBR article by Huston and Sakkab.)

Balancing external and internal R&D activities is key to achieving higher levels of innovation

R&D generates new knowledge via process or product innovation and it increases a company’s absorptive capacity. This affects the innovative performance in turn. Studies show a positive relationship between internal and external R&D; it also implies a complementarity between the two. Changing innovation models show that companies are moving away from closed internal R&D processes and increasingly relying on external sources to shorten the product lifecycle, cut down costs, use new and complex technologies, and boost innovation outcomes.

Companies can cooperate on R&D with suppliers, competitors, customers, research organizations. A popular example is a battle between Cisco and Lucent for innovation leadership, where the leading networking company beat a company (which inherited a major portion of Bell Labs) that has an amazingly strong internal research team by investing, partnering, and acquiring companies that had the innovation it was looking for.

New rationale for internal R&D

Source: Chesbrough (2003)

Companies need to innovate fast but the “rhythm of basic research” doesn’t always step up to the task

They often need to seek knowledge created in outside labs, along with their internal R&D efforts, for commercialization. Once firms identify and acquire innovations from external sources, they need to integrate them into their R&D activities, addressing possible technological barriers to assimilation and cultural impediments such as the “not invented here” tendency (this is where the right organizational culture comes into play).

Companies can either acquire and internalize the external innovation sources or just enter into partnerships for specific projects. For example, Dr. Reddy’s, Hyderabad-based multinational pharmaceutical company, acquired the 20-year-old UK-based Chirotech from Dow Pharma in 2008, to strengthen its core drug business. (This is an interesting research paper on leveraging external sources of innovation that appeared in The Journal of Product Innovation Management, Volume 31, Issue 4, 2013.)

Reinventing the business model trumps rushing to the market first

The essence of a business model is in defining how the enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit. (David J Teece, 2010) For instance, companies can make profits from a new technology by integrating a new technology in their existing businesses or licensing it to other firms or launching new projects to try it out on new business pitches. When these don’t work, both established and startup firms might need to tweak the dominant logic to create economic value in “an environment of high technical and market uncertainty.” Also, sometimes, in a hurry to commercialize first, companies go in without the necessary learning that comes from collaboration.

Business models change with mutualistic relationships, adapting and remodeling owing to valuable feedback that ups the chances of success for the innovator. The Razor-Blade is a good example of business model innovation. Gillette sold its razors cheap, but it sold the blades at a higher margin. Amazon’s Kindle and Apple’s iTunes adopted this model too.

If you need something done right, you don’t always need to do it yourself

“You have half an idea, somebody else has the other half, and if you are in the right environment, they turn into something larger than the sum of their parts,” says Steven Johnson at a wonderful TED talk on Where good ideas come from a few years ago. That’s exactly what open innovation is. And toward the end of his talk, he talks about an excellent example of Sputnik and the birth of the GPS.

In this innovation approach, you get many diverse ideas from possibly unexpected domains and the innovation burden is shared. For example, the success of Johnson & Johnson’s DREAMS Innovation Challenge to create an AIDS-free future for African girls and women came from varied ideas from 684 organizations, both existing and new partners, which submitted over 800 ideas.

Open innovation and Internal Property Rights are not irreconcilable

While open innovation depends on exploiting internal and external ideas and pathways to maximize growth, IP rights refer to exclusive rights a person or a company has over its ideas, plans, and other intangible assets without fear of the competition stealing them. They do seem at odds, don’t they?

With collaboration being the cornerstone of innovation strategies at large patent holders such as Philips, IBM, and Microsoft have found ways to derive profit from open innovation projects by carefully managing IP rights and protecting cooperative alliances. (Read Does IP strategy have to cripple open innovation? in the MIT Sloane Management Review for some insightful questions.) To be profitable, IP should be available to others through cooperation and licensing. For example, Royal Philips Electronics is thriving thanks to licensing over 60,000 patents.

Conclusion

World over, businesses have recognized the importance of tying up with start-ups, venture capitalists, accelerators, corporate R&D labs, and universities to build and bring innovative solutions to market. To save time and money and enhance operations, companies of all sizes and academic institutions are looking beyond the four walls to compete and sustain the long term. Technological advances and new solutions are enriching the innovation ecosystem, resulting in exciting business models and possibilities.

Although challenges such as the loss of competitiveness in the long term, managing IP rights, and making the requisite changes in culture/infrastructure can seem intimidating, carefully designing win-win strategic partnerships can bring more opportunities at lower risk. Embracing the above-mentioned open innovation principles and implementing them should fuel the much-needed innovation every company looks for, because the personal and professional rewards that come from collaborative approaches are unmatched.

 

About the Author

Dhanya Menon
Dhanya Menon is an editor and academic writer. This is her first stint in content marketing, having spent over 5 years in e-learning. Her interests are varied. She likes to lose track of time reading anything from chemistry to Allende, from statistics to Thurber cartoons, from Ruth Rendell to listening to her son's unique take on life.
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