Open innovation is the concept of solving problems using ideas and expertise that are outside of a company’s practice of proprietary research and product development, which is a closed system of innovation.
The term “open innovation” was coined by business professor Henry Chesbrough in his 2003 book of the same name. This book made the case for open innovation. It presented examples from the tech industry to make its point, using Xerox and PARC, IBM, Intel, and Lucent as case studies.
“Open innovation” is practiced across all industries and existed well before it became known by this term.
It was the World Wide Web that enabled the open innovation concept to be practiced efficiently by allowing parties to reach broad audiences.
Yet2.com was founded in 1999 by business managers from DuPont and Polaroid. They sought more efficient ways to sell their intellectual property.
Just as university tech transfer offices sought to out-license their intellectual property, companies also found that licensing their unused intellectual property would monetize assets that would otherwise lie dormant.
This model of open innovation is simply making patents available for licensing through the Internet.
The first instance where a company out-sourced in-house technical problems to a broad public audience was in 2001 when Eli Lilly, a pharmaceutical company, launched InnoCentive. As explained in Innocentive’s website, the idea came to two chemists at Eli Lilly in 1998 when they were exploring applications of the Internet. The result was a website that presented technical challenges that existed within companies to people from anywhere in the world to solve, with cash prizes to usable solutions.
How can a company open up about its problems? Eli Lilly already held numerous patents to their medicines. A set of their problems were in finding cost effective ways to manufacture these patented medicines. Letting people know that they wanted a better manufacturing method would not jeopardize the patent protection of the medicine. Not surprisingly, most of the early competitions on InnoCentive were process chemistry problems and also challenges in chemical synthesis.
This is an example of using a competition to practice open innovation.
XPRIZE pre-dates InnoCentive by a few years. It is also a competition, but of a public nature, where the solution is not being sought by a private firm.
It gives multi-million dollar awards to successful teams who apply science and technology to solve big challenges that can eventually improve humanity. The first challenge was issued in 1996 to achieve suborbital flight. The ensuing technology race arguably spawned the current private sector space companies like those from Richard Branson, Elon Musk, and Jeff Bezos. Another was the Tricorder XPRIZE to develop a diagnostic device like the tricorder used in Star Trek. The current list of challenges are taking directions towards the environment and human empowerment.
2002: Procter & Gamble
P&G’s growth had stalled in 2000 and was in fact in decline with a portfolio of staid consumer brands. In a dramatic company turn-around that is now a standard business case, P&G developed an open source innovation model call “Connect and Develop.”
The prior model of the corporate R&D lab to invent all of P&G’s products was no longer sustainable. It worked when the company was below $25 billion in revenue. When P&G reached $70 billion, apart from inorganic growth (i.e. accretive acquisitions), it had to create organic growth of 4% to 6% per year. This meant creating a new $4 billion business each year.
The idea of “Connect and Develop” was that there were hundreds of scientists and engineers in the outside world with whom they could connect for new sources of innovation that P&G could then adapt and develop into products.
Their process was not the same as outsourcing innovation, which is contracting with outsiders to develop innovations for P&G.
Their “Connect and Develop” process began with P&G’s perspectives of consumers’ needs, and then finding good, novel ideas throughout the world that can be adapted and developed in-house, using P&G’s own R&D, manufacturing, marketing, and supply chain capabilities to create the final product.
For example, P&G identified customer interest in a new line of Pringles potato chips with pictures and words printed on each chip, such as trivia questions, animal facts, and jokes. However, it would have taken two years and a large R&D budget to just create a prototype.
Using open innovation, their European network discovered a small bakery in Bologna Italy run by a university professor that used baking equipment he had invented to ink-jet-print edible images on cakes and cookies. They adapted this equipment to create and launch the Pringles product line in under two years, and at considerably less cost than an in-house R&D effort.
This “Connect and Develop” process was expanded company wide with the target of having 50% of new product innovations come from outside the company. By 2006, this metric had reached 35%.
This model of innovation is about adapting external technologies or product concepts for the company’s development pipeline.
This model of innovation is more complex in operation and execution than the prior examples, because it involves deep engagement by cross functional teams and leaders.
At the scale performed by P&G, it also required creating the company culture that would enable this practice, which is the subject of another case study.
For this model of open innovation to be successful, even at the scale of a single program within a company, it has to be performed within the context of the culture and interpersonal dynamics of the company.
I have done this in many different companies. The approach has been different every time. In every case, execution depends
- first, on the power dynamics and decision-making structures within the company, and
- second, on the engagement and capabilities of the people and teams that would be needed to implement the technology.
These determine the focus area, the budget, and the project(s) itself, rather than the other way around.
Open innovation as an industry itself
Since 2003, this field has evolved into an industry itself.
Even professor Henry Chesbrough has his own blog and website that covers the many different best practices in open innovation.
Yet2.com and InnoCentive have grown beyond their original businesses to offer additional services.
Many other companies have appeared in this space offering technology scouting services and technology mapping services. A while ago, I counted over thirty in the U.S. alone.
For example, I have used NineSigma. They offer a range of services that exemplify how open innovation is practiced today:
- Innovation challenge: this is the open competition with cash prizes that was described above.
- Innovation council: a panel of external experts are assembled to advise the client on a defined area.
- Technology & expert search: they search the world for experts and companies that may be able to help with the client’s defined problem.
Open innovation is also a key sell by economic development
We should also include the government sector in the business of open innovation. When economic development organizations seek to attract investment from companies – i.e. entice a company to open a branch in their jurisdiction, hence providing job creation – a key part of the sales pitch is that the local region is an innovation hub that can make open innovation easier for the company if it was operating in the area.
Open innovation as the purposeful inflow and outflow of knowledge to accelerate innovation
The practice of open innovation by private companies has evolved considerably since 2000.
It is now even acknowledged in public policy, where economic development aims to create innovation hubs to attract these companies for job creation and economic growth.
Professor Chesbrough notes that open innovation goes both ways. Here is where I see one side is not keeping up.
Here is Professor Chesbrough’s explanation of the origins of his work on open innovation and his definition of the practice:
I’m a professor at UC Berkeley’s Haas Business School, and a former manager in the computer disk drive industry in Silicon Valley. When I worked in the Valley, I distinctly recall feeling frustrated that there weren’t more useful ideas and advice from academia. It seemed like the concerns of professors and the concerns of managers like me were far, far apart.
Open innovation is a concept I originated that falls directly in that gap between business and academe. Conceptually, it is a more distributed, more participatory, more decentralized approach to innovation, based on the observed fact that useful knowledge today is widely distributed, and no company, no matter how capable or how big, could innovate effectively on its own.
So there’s a lot of opportunity for business to profit from open innovation. Hundreds of companies around the world now have executives with the job title, Manager of Open Innovation. And there are now dozens of software companies, intermediaries, and consultants providing products and services in open innovation.
So what is open innovation? My definition is more nuanced than that of many people. Open innovation is “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively.” Open innovation can be understood as the antithesis of the traditional vertical integration approach where internal R&D activities lead to internally developed products that are then distributed by the firm. As my definition suggests, there are two facets to open innovation. One is the “outside in” aspect, where external ideas and technologies are brought into the firm’s own innovation process. This is the most commonly recognized feature of open innovation. The other, less commonly recognized aspect is the “inside out” part, where un- and under-utilized ideas and technologies in the firm are allowed to go outside to be incorporated into others’ innovation processes.
It is noteworthy that he mentions how distant universities and companies are on sharing useful ideas, even in Silicon Valley. The state of this gap is no better today.
He also notes that while companies have come around to the practice of open innovation, the reverse is less common, where ideas and technologies from companies and industries are incorporated into others’ innovation processes.
These “others” are other parts of the ecosystem, predominately universities. Universities continue to stake the domain of basic science and discovery, largely unaware of the innovations happening in industry.
This leads to an asymmetric relationship where companies benefit from the inflow of knowledge from the ecosystem, make products and profits, and grow stronger. In Canada, most of these companies are not domestic. This means the macroeconomic benefits are not being retained as well as when the companies are domestic.
Canadian universities need to develop stronger open innovation practices where their knowledge creation can benefit domestic companies, and since there are so few eligible domestic companies, then for entrepreneurship.
Open innovation can also be practiced by individuals and by organizations without R&D
Open innovation is not just a practice for companies. Individuals can pursue open innovation by working together. A hackathon is an example. In the next post, we will have an open innovation challenge.