May 19, 2020
Not long ago, innovation was a largely internal affair. The journey from the laboratory to the marketplace took place largely within the four walls of the firm. Think of Bell Labs, IBM Research, or Xerox PARC. Each of them created important technological breakthroughs. And each breakthrough was commercialized through the company’s own businesses.
In recent years, though, this do it all yourself approach is increasingly hard to sustain. It costs a lot of money to support each of the many processes needed to achieve success in the market. It takes a long time to complete the journey, at a time when the world is changing more and more rapidly. And it places all the risk squarely on your own shoulders. This unpromising combination of cost, time, and risk has caused many organizations to rethink their approach to innovation. There is an alternative approach that offers a better combination of lower internal cost, faster time to market, and shared risk. It is an approach known as Open Innovation.
Innovation is generated by harnessing flows of knowledge across the boundary of the firm
Open Innovation is based on the fundamental idea that useful knowledge is now widespread throughout society. No one organization has a monopoly on great ideas, and every organization, no matter how effective internally, needs to engage deeply and extensively with external knowledge networks and communities. An organization that practices open innovation will utilize external ideas and technologies as a common practice in their own business (outside-in open innovation) and will allow unused internal ideas and technologies to go to the outside for others to use in their respective businesses (inside-out open innovation).
The open innovation paradigm is best understood as the antithesis of the traditional vertical integration model, where internal innovation activities lead to internally developed products and services that are then distributed by the firm through its own business model. Put into a single sentence, open innovation is a distributed innovation process based on purposively managed knowledge flows across organizational boundaries, using pecuniary and non-pecuniary mechanisms in line with the organization’s business model. This is an admittedly academic definition. But it basically means that innovation is generated by accessing, harnessing, and absorbing flows of knowledge across the boundary of the firm, either flowing in or going out.
What evidence is there that open innovation actually works? Many individual companies such as Procter & Gamble have proudly proclaimed their success with their version of open innovation called Connect and Develop. Another consumer products firm, General Mills, analyzed 60 new product introductions in a 12 month period. They found that those which had a substantial contribution from open innovation outsold the ones that did not by more than 100%. In the industrial sector, a recent study of 489 projects inside a large European manufacturer found that projects involving significant open innovation collaboration achieved a better financial return for the company than projects that did not.
However, open innovation can go awry as well. In particular, during the financial crisis of 2008-2009, a number of companies seem to have used the rhetoric of open innovation to make big cuts in internal R&D spending. And when the markets recovered from the significant crisis, many of these same companies had damaged their own ability to innovate, and recover their market position from before the crisis. Now we are in the midst of another downturn, it will be necessary to apply open innovation properly, if organizations are to maintain their innovative capacity.
Henry is an American organizational theorist, adjunct professor and the faculty director of the Garwood Center for Corporate Innovation at the Haas School of Business at the University of California, Berkeley. He is known for coining the term open innovation. His latest book is Open Innovation Results
Image by jose_andres95