8.1 Open innovation models
6 min read•august 20, 2024
Open innovation models revolutionize how companies innovate by leveraging external ideas and resources. This approach contrasts with traditional closed innovation, allowing firms to tap into a broader pool of knowledge and expertise to accelerate product development and reduce costs.
The open innovation process involves identifying needs, sourcing external knowledge, and integrating it internally. Key strategies include forming strategic alliances, engaging with intermediaries, and collaborating with universities. Successful implementation requires balancing open and closed approaches, aligning with strategy, and fostering a culture of openness.
Defining open innovation
- Open innovation is a paradigm that assumes firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as they look to advance their technology
- Involves the inflow and outflow of knowledge to accelerate internal innovation and expand the markets for external use of innovation
- Contrasts with the traditional closed model of innovation where companies rely solely on their own R&D and resources
Principles of open innovation
- Valuable ideas can come from inside or outside the company and can go to market from inside or outside the company
- External R&D can create significant value, while internal R&D is needed to claim some portion of that value
- Building a better business model is more important than getting to market first
- Both internal and external ideas are essential to win, and companies should actively buy and sell IP where advantageous
Benefits of open innovation
Reduced R&D costs
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- Leveraging external R&D resources and expertise can lower internal R&D expenses
- Sharing R&D costs with partners spreads the financial risk
- Avoiding duplication of research efforts done by others
Faster time to market
- Accessing already-developed technologies accelerates product development cycles
- Parallel processing of R&D with external partners speeds up innovation
- Tapping into external innovation ecosystems brings products to market quicker
Increased innovation success rates
- Diversity of viewpoints and approaches enhances creative problem-solving
- Validating ideas with external parties early on improves success odds
- Failures can be detected and eliminated sooner through external feedback
Challenges of open innovation
IP ownership and protection
- Contractual agreements are needed to clarify IP rights in collaborative innovation
- Measures must be taken to prevent unintended knowledge spillovers to competitors
- Balancing IP protection with the openness required for effective partnerships
Cultural resistance to external ideas
- Overcoming the "not invented here" syndrome where external ideas are viewed skeptically
- Shifting mindsets from knowledge hoarding to knowledge sharing
- Encouraging employees to embrace and not fear outside perspectives
Managing external partnerships
- Identifying and selecting the right innovation partners
- Aligning differing objectives, timelines and expectations among partners
- Coordinating and integrating collaborative innovation activities across boundaries
Inbound vs outbound open innovation
- Inbound open innovation brings in external knowledge and resources to enhance the company's own innovations (Procter & Gamble's "Connect + Develop" program)
- Outbound open innovation is externally commercializing a company's internal ideas and technologies that don't fit the current business model (Xerox's spin-off of Palo Alto Research Center technologies)
- Coupled open innovation combines outside-in and inside-out knowledge flows to co-create innovations with complementary partners (Unilever and Symrise co-developing anti-perspirant technology)
Open innovation process
Identifying innovation needs
- Defining strategic areas where external innovation can add the most value
- Analyzing gaps and weaknesses in internal innovation capabilities
- Gathering input from customers, suppliers and other stakeholders on desired innovations
Sourcing external knowledge and technologies
- Systematically scouting for useful knowledge and inventions from multiple industries
- Engaging to connect with novel solution providers
- Participating in and campaigns to solicit ideas
Integrating external innovations internally
- Establishing cross-functional teams to evaluate and absorb external innovations
- Developing processes to experiment with and validate external technologies
- Providing incentives for employees to champion and integrate external ideas
Open innovation partnerships
Strategic alliances for open innovation
- Forming mutually beneficial alliances to share complementary resources and capabilities
- Co-developing new products and technologies with value chain partners (suppliers, distributors)
- Participating in innovation networks and consortia within or across industries
Engaging with innovation intermediaries
- Working with organizations that specialize in connecting innovation seekers with providers (NineSigma, InnoCentive)
- Accessing technical expertise of contract research organizations and design consultancies
- Using venture capital firms to scout and invest in relevant startup companies
Collaborating with universities and research institutions
- Sponsoring academic research in areas of strategic interest
- Licensing university-developed IP for commercial use
- Establishing joint industry-university research centers for long-term collaboration
Managing an open innovation portfolio
Balancing open vs closed innovation
- Determining which core competencies should remain proprietary vs open
- Dynamically adjusting the mix of open vs closed innovation based on changing needs
- Using an open innovation approach for select projects while using traditional closed innovation for others
Aligning open innovation with strategy
- Ensuring external innovation sourcing supports the company's overall strategic objectives
- Focusing open innovation efforts on areas that create a sustainable competitive advantage
- Regularly reviewing and updating open innovation priorities as strategies evolve
Measuring open innovation performance
- Defining key performance indicators for open vs closed innovation projects
- Tracking the percentage of revenues and profits from products with external origins
- Monitoring process metrics on partner interactions and external knowledge flows
Open innovation platforms and tools
Crowdsourcing and idea contests
- Using online platforms to broadcast innovation challenges to a wide audience (Cisco I-Prize)
- Providing incentives for crowds to submit and vote on the best ideas and solutions
- Adopting winning ideas for further internal development and commercialization
Innovation marketplaces and IP exchanges
- Participating in online marketplaces to buy, sell or license patented technologies (yet2.com)
- Auctioning non-core IP to other entities that can productively use it (Ocean Tomo)
- In-licensing external IP to accelerate and enhance internal innovation efforts
Open source software and hardware
- Using open source as a low cost way to develop non-differentiating components
- Contributing to open source projects to shape the technology's evolution (Google and Android)
- Providing open source tools to create complementary products and services (Amazon Web Services)
Organizational culture for open innovation
Fostering a culture of openness and collaboration
- Encouraging information sharing and cross-pollination of ideas across the organization
- Providing tools and spaces for collaboration between internal and external parties
- Promoting values of trust, reciprocity and a shared purpose with innovation partners
Overcoming "not invented here" syndrome
- Educating employees on the strategic rationale and benefits of open innovation
- Showcasing successful use cases of external technologies creating value
- Rotating employees to innovation outposts to gain direct exposure to outside ideas
Incentivizing and rewarding open innovation
- Including open innovation metrics in performance evaluation and compensation
- Recognizing and celebrating individuals and teams that effectively leverage external innovations
- Offering innovation prizes and bonuses for sourcing and integrating external ideas
Future trends in open innovation
Increasing globalization of open innovation
- Tapping into knowledge and talent from emerging markets and distant geographies
- Adapting open innovation approaches to differing cultural and institutional contexts
- Forming global innovation networks to sense and respond to local market needs
Rise of open data and open science
- Using open government data to spur novel innovations and public-private collaborations
- Participating in pre-competitive open science consortia to solve complex shared challenges
- Providing open access to research findings to accelerate overall scientific progress
Emergence of open business models
- Creating multi-sided platforms that facilitate collaborative value creation and capture (Apple's iOS ecosystem)
- Sharing core assets and capabilities to enable a network of complementary innovations (GE's Predix platform)
- Shifting from selling products to providing solutions through open partnerships (Rolls Royce's Power-by-the-Hour)
Key Terms to Review (18)
Clayton Christensen: Clayton Christensen was a renowned American academic and author, best known for his work on innovation, particularly the concept of disruptive innovation. His theories have reshaped how companies approach innovation management, strategic planning, and competitive dynamics in various industries.
Co-creation: Co-creation is a collaborative process where multiple stakeholders, including customers, partners, and organizations, actively participate in the design and development of products, services, or experiences. This approach encourages shared value and innovation by integrating diverse perspectives and expertise, ultimately leading to enhanced outcomes and user satisfaction.
Crowdsourcing: Crowdsourcing is the practice of engaging a large group of people, often from an online community, to contribute ideas, content, or services for a project or problem. This approach leverages the collective intelligence and diverse perspectives of individuals outside of a traditional organization, allowing for innovation and creative solutions through collaboration.
Digital platforms: Digital platforms are online frameworks that facilitate the exchange of information, goods, or services among users and providers. These platforms leverage technology to connect different stakeholders, enabling collaboration, innovation, and commerce in a more efficient manner. They often operate on a model that promotes user-generated content, crowd interaction, and resource sharing, creating ecosystems where ideas and solutions can thrive.
External knowledge sourcing: External knowledge sourcing refers to the practice of obtaining knowledge, ideas, and innovations from outside an organization to enhance its own capabilities and performance. This approach recognizes that valuable insights and solutions often exist beyond a company's internal boundaries, allowing for greater creativity and the potential for breakthrough innovations. By integrating external perspectives, companies can effectively leverage diverse expertise and experience, which is a fundamental aspect of open innovation models.
Henry Chesbrough: Henry Chesbrough is an influential scholar and business theorist known for his work on open innovation, a concept that encourages organizations to utilize external ideas and technologies alongside their internal resources to advance their innovation efforts. His ideas have transformed the way companies approach innovation management by promoting collaboration with outside entities, including customers, suppliers, and other businesses. This shift in thinking has significant implications for strategic innovation management, platform business models, open innovation models, co-creation with users, and the establishment of innovation networks.
Innovation contests: Innovation contests are structured competitions designed to encourage individuals or groups to generate novel ideas or solutions for specific challenges or problems. These contests harness the creativity and expertise of a diverse participant pool, often leading to breakthrough innovations that may not arise in traditional organizational settings. By leveraging external talent, innovation contests promote collaboration and foster an environment where ideas can flourish, connecting closely with concepts like open innovation, crowdsourcing, and co-creation.
Innovation diffusion: Innovation diffusion is the process through which new ideas, practices, or products spread among individuals, organizations, or communities. This process is crucial for understanding how innovations gain acceptance and become integrated into daily life or business practices, often influenced by social, cultural, and economic factors.
Innovation ecosystem: An innovation ecosystem refers to a network of interconnected organizations, individuals, and resources that collaboratively foster innovation and drive technological advancements. This dynamic environment includes various stakeholders such as businesses, startups, academic institutions, government agencies, and users, all contributing to the creation and commercialization of new ideas. By integrating diverse knowledge and resources, innovation ecosystems enhance creativity and improve the overall efficiency of the innovation process.
Innovation impact assessment: Innovation impact assessment is a systematic approach to evaluating the potential effects and outcomes of innovative projects or initiatives on various stakeholders and the broader environment. This process helps organizations determine the value, risks, and opportunities associated with their innovations, guiding decision-making and strategy development. By assessing the social, economic, and environmental impacts, organizations can better align their innovations with stakeholder needs and societal goals.
Innovation intermediaries: Innovation intermediaries are organizations or individuals that facilitate collaboration between different parties in the innovation process, such as businesses, researchers, and government entities. They play a crucial role in bridging gaps between knowledge sources and innovation users, helping to connect ideas, resources, and capabilities to drive successful innovation outcomes.
Intellectual property issues: Intellectual property issues refer to the legal challenges and considerations surrounding the ownership, protection, and use of creative works, inventions, and proprietary knowledge. These issues often arise when multiple parties are involved in innovation processes, leading to questions about who owns the rights to ideas or products developed collaboratively. Understanding intellectual property is crucial for fostering open innovation and user-driven design while ensuring that creators receive proper recognition and financial benefits.
Lead Users: Lead users are individuals or organizations that experience needs significantly ahead of the average user, often pioneering innovative solutions to address those needs. They play a critical role in open innovation models as they provide valuable insights and feedback that can lead to the development of new products and services, bridging the gap between market demand and technological capabilities.
Open Innovation 2.0: Open Innovation 2.0 is an advanced approach to innovation that emphasizes collaborative processes between organizations, individuals, and society as a whole. It builds on the concept of Open Innovation by fostering a more fluid exchange of ideas and knowledge across various stakeholders, including consumers, researchers, and entrepreneurs, leading to co-creation of value. This model reflects the integration of digital technologies and global connectivity, enhancing the ability to tap into diverse perspectives and resources for innovative solutions.
Partnerships with startups: Partnerships with startups involve collaborations between established companies and emerging businesses to leverage innovation, agility, and fresh perspectives. These partnerships allow larger firms to tap into new technologies and business models while providing startups with resources, market access, and expertise that can accelerate their growth. This dynamic is essential in fostering a culture of open innovation, where companies engage external entities to co-create value and drive competitive advantage.
Return on Innovation Investment: Return on Innovation Investment (ROII) measures the financial return generated by investments made in innovation activities. It connects the efforts of developing new products, services, or processes to their economic impact, helping organizations evaluate the effectiveness of their innovation strategies and allocate resources more efficiently.
Social media collaboration: Social media collaboration refers to the process where individuals or organizations work together on social media platforms to achieve shared goals, share information, or generate innovative ideas. This method allows for real-time communication and engagement, leveraging diverse perspectives and expertise from various contributors. The collaborative aspect enhances the innovation process by tapping into a broader community and fostering open dialogue.
Triple helix model: The triple helix model is a framework that describes the interaction between academia, industry, and government in the innovation process. It emphasizes the collaboration and knowledge exchange among these three sectors to foster innovation and drive economic growth. This model illustrates how combining the strengths of universities, businesses, and public institutions can lead to new technologies and solutions, creating a dynamic environment for innovation.