Open innovation

For other uses, see Open Innovations (Forum and Technology Show).

Open innovation is a term promoted by Henry Chesbrough, adjunct professor and faculty director of the Center for Open Innovation at the Haas School of Business at the University of California, in a book of the same name, though the idea and discussion about some consequences (especially the interfirm cooperation in R&D) date as far back as the 1960s. The term refers to the use of both inflows and outflows of knowledge to improve internal innovation and expand the markets for external exploitation of innovation.

The concept is also related to user innovation, cumulative innovation, know-how trading, mass innovation and distributed innovation.

“Open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology”. Alternatively, it is "innovating with partners by sharing risk and sharing reward." The boundaries between a firm and its environment have become more permeable; innovations can easily transfer inward and outward.

The central idea behind open innovation is that, in a world of widely distributed knowledge, companies cannot afford to rely entirely on their own research, but should instead buy or license processes or inventions (i.e. patents) from other companies. In addition, internal inventions not being used in a firm's business should be taken outside the company (e.g. through licensing, joint ventures or spin-offs).

The open innovation paradigm can be interpreted to go beyond just using external sources of innovation such as customers, rival companies, and academic institutions, and can be as much a change in the use, management, and employment of intellectual property as it is in the technical and research driven generation of intellectual property. In this sense, it is understood as the systematic encouragement and exploration of a wide range of internal and external sources for innovative opportunities, the integration of this exploration with firm capabilities and resources, and the exploitation of these opportunities through multiple channels.

Advantages

Open innovation offers several benefits to companies operating on a program of global collaboration:

• Reduced cost of conducting research and development
• Potential for improvement in development productivity
• Incorporation of customers early in the development process
• Increase in accuracy for market research and customer targeting
• Potential for synergism between internal and external innovations
• Potential for viral marketing

Disadvantages

Implementing a model of open innovation is naturally associated with a number of risks and challenges, including:

• Possibility of revealing information not intended for sharing
• Potential for the hosting organization to lose their competitive advantage as a consequence of revealing intellectual property
• Increased complexity of controlling innovation and regulating how contributors affect a project
• Devising a means to properly identify and incorporate external innovation
• Realigning innovation strategies to extend beyond the firm in order to maximize the return from external innovation

Models of open innovation

Product platforming

This approach involves developing and introducing a partially completed product, for the purpose of providing a framework or tool-kit for contributors to access, customize, and exploit. The goal is for the contributors to extend the platform product's functionality while increasing the overall value of the product for everyone involved.

Readily available software frameworks such as a software development kit (SDK), or an application programming interface (API) are common examples of product platforms. This approach is common in markets with strong network effects where demand for the product implementing the framework (such as a mobile phone, or an online application) increases with the number of developers that are attracted to use the platform tool-kit. The high scalability of platforming often results in an increased complexity of administration and quality assurance.

Idea competitions

This model entails implementing a system that encourages competitiveness among contributors by rewarding successful submissions. Developer competitions such as hackathon events fall under this category of open innovation. This method provides organizations with inexpensive access to a large quantity of innovative ideas, while also providing a deeper insight into the needs of their customers and contributors.

Customer immersion

While mostly orientated towards the end of the product development cycle, this technique involves extensive customer interaction through employees of the host organization. Companies are thus able to accurately incorporate customer input, while also allowing them to be more closely involved in the design process and product management cycle.

Collaborative product design and development

Similarly to product platforming, an organization incorporates their contributors into the development of the product. This differs from platforming in the sense that, in addition to the provision of the framework on which contributors develop, the hosting organization still controls and maintains the eventual products developed in collaboration with their contributors. This method gives organizations more control by ensuring that the correct product is developed as fast as possible, while reducing the overall cost of development. Dr. Henry Chesbrough recently supported this model for open innovation in the optics and photonics industry.

Innovation networks

Similarly to idea competitions, an organization leverages a network of contributors in the design process by offering a reward in the form of an incentive. The difference relates to the fact that the network of contributors are used to develop solutions to identified problems within the development process, as opposed to new products.

Closed versus open innovation

The paradigm of closed innovation holds that successful innovation requires control. Particularly, a company should control the generation of their own ideas, as well as production, marketing, distribution, servicing, financing, and supporting. What drove this idea is that, in the early twentieth century, academic and government institutions were not involved in the commercial application of science. As a result, it was left up to other corporations to take the new product development cycle into their own hands. There just was not the time to wait for the scientific community to become more involved in the practical application of science. There also was not enough time to wait for other companies to start producing some of the components that were required in their final product. These companies became relatively self-sufficient, with little communication directed outwards to other companies or universities.

Throughout the years several factors emerged that paved the way for open innovation paradigms:

• The increasing availability and mobility of skilled workers
• The growth of the venture capital market
• External options for ideas sitting on the shelf
• The increasing capability of external suppliers

These four factors have resulted in a new market of knowledge. Knowledge is not anymore proprietary to the company. It resides in employees, suppliers, customers, competitors and universities. If companies do not use the knowledge they have inside, someone else will. Innovation can be generated either by means of closed innovation or by open innovation paradigms. There is an ongoing debate on which paradigm will dominate in the future.

Terminology of open innovation

Modern research of open innovation is divided into two groups, which have several names, but are similar in their essence (discovery and exploitation; outside-in and inside-out; inbound and outbound). The common factor for different names is the direction of innovation, whether from outside the company in, or from inside the company out:

Revealing (non-pecuniary outbound innovation)

This type of open innovation is when a company freely shares its resources with other partners, without an instant financial reward. The source of profit has an indirect nature and is manifested as a new type of business model.

Selling (pecuniary outbound innovation)

In this type of open innovation a company commercialises its inventions and technology through selling or licensing technology to a third party.

Sourcing (non-pecuniary inbound innovation)

This type of open innovation is when companies use freely available external knowledge, as a source of internal innovation. Before starting any internal R&D project a company should monitor the external environment in search for existing solutions, thus, in this case, internal R&D become tools to absorb external ideas for internal needs.

Acquiring (pecuniary inbound innovation)

In this type of open innovation a company is buying innovation from its partners through licensing, or other procedures, involving monetary reward for external knowledge

Open source versus open innovation

Open source and open innovation might conflict on patent issues. This conflict is particularly apparent when considering technologies that may save lives, or other open-source-appropriate technologies that may assist in poverty reduction or sustainable development. However, open source and open innovation are not mutually exclusive, because participating companies can donate their patents to an independent organization, put them in a common pool, or grant unlimited license use to anybody. Hence some open-source initiatives can merge these two concepts: this is the case for instance for IBM with its Eclipse platform, which the company presents as a case of open innovation, where competing companies are invited to cooperate inside an open-innovation network.

In 1997, Eric Raymond, writing about the open-source software movement, coined the term the cathedral and the bazaar. The cathedral represented the conventional method of employing a group of experts to design and develop software (though it could apply to any large-scale creative or innovative work). The bazaar represented the open-source approach. This idea has been amplified by a lot of people, notably Don Tapscott and Anthony D. Williams in their book Wikinomics. Eric Raymond himself is also quoted as saying that 'one cannot code from the ground up in bazaar style. One can test, debug, and improve in bazaar style, but it would be very hard to originate a project in bazaar mode'. In the same vein, Raymond is also quoted as saying 'The individual wizard is where successful bazaar projects generally start'.

Open-source specialist François Letellier advocates that open source (or free software) is a natural way of innovation in the software industry and that it is an exemplary and very effective form of open innovation, with open-source projects/communities act as innovation intermediaries.

See also

• Discovery Network
• Ideas bank
• Innovation
• Innovation intermediary
• Open innovation intermediaries
• Open-source appropriate technology
• Open data
• Open research
• Open-source hardware
• TED (conference)
• Open Innovations (Forum and Technology Show)

External links

• Innovative Ideas Sources