Posted on December 5, 2015 - There’s been lots of talk recently about “open innovation.” Dr. Henry Chesbrough, at UC Berkeley’s Haas School of Business, coined the term and has written three books on the subject. It’s now become a popular buzzword, but what does open innovation really mean?To understand open innovation, we need to understand innovation itself. Innovation is about commercializing products or services based on inventions. It is about taking research and inventions from the lab and developing them into products to be sold in the marketplace. Many inventions, even those that are patented, never make it beyond the lab. That’s why innovation, not just invention, is vital for companies to achieve competitive advantage. Companies do this by introducing new or improved products, or producing existing products more efficiently.
“Closed innovation” describes the way innovation often happened over the past century. Under this paradigm, the most successful companies were those that made large investments in internal research and development (R&D). This gave them a constant stream of innovative ideas that could be developed into new products. They also invested heavily in IP protection to prevent competitors from infringing on this internal R&D. Money was key to this model. The companies that came out on top were those that had the most research funding, the best technical resources, and the most state-of-the-art facilities. It was difficult for smaller companies to compete with established players.
Toward the end of the twentieth century, however, this paradigm began to fail. Highly skilled employees were becoming more mobile, moving from one company to another and taking their experience with them. The availability of venture capital funding for startups encouraged more employees to leave large research organizations and start their own companies. These employees were taking their knowledge and skills gained after many years of experience working in research labs of large companies, leaving these companies with no return on their investment. The closed innovation paradigm was no longer working, but a new standard for innovation was starting to develop. It was called “open innovation.”
Open innovation embraces the idea that not all technology must be internally developed. External ideas can be brought into a company and used to build innovative products. This can be done through licensing technologies or by acquiring entire companies developing technologies of interest. Similarly, internally developed technology that is not used can be monetized through licensing or by creating startup companies that can commercialize these technologies more effectively.
A shift toward open innovation is underway. It has been easier to adopt in some industries than others, and many companies are understandably reluctant to change existing business models. However, companies that fail to incorporate at least some aspects of open innovation will likely have difficulty competing against those that take the plunge. As companies begin to expand their search for innovation beyond internal R&D, universities can become important sources of new technology. Companies can use universities’ expertise and resources as extensions of their own research teams. They can sponsor research into specific areas of interest, and negotiate ownership or exclusive licensing rights to any resulting technology. They can also guard their inventions with IP protection such as patents.
Open Innovation can be a powerful source of competitive advantage, even for large companies, if employed effectively. Since only a small proportion of even the most innovative research is ever successfully commercialized, companies working under the old paradigm of developing all innovation internally end up with lots of technology and ideas that never get commercialized. Only technology that fits the business goals and direction of the company ever gets developed into a commercial product. Companies that embrace open innovation can avoid this wasted investment, and can focus on investing in innovation, internal or external, that fits their business needs.
Of course, this is easier said than done. To effectively utilize an open innovation paradigm requires, among other things, an appropriate organizational structure, a well trained innovation staff that knows the process and potential pitfalls, processes and procedures for integrating externally developed technology, and a savvy IP team to negotiate licensing agreements to secure needed technologies quickly and effectively. Perhaps these can be topics for future blog posts.
In the meantime, I would be very interested to know your experience and thoughts on open innovation. Is it really a new phenomenon, or is it just a meaningless buzzword? Can it really be part of a successful business strategy? I look forward to reading your comments in the comments section below.
photo credit: Resources for learning about open innovation via photopin (license)
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