Open Innovation At the same time that the open source movement is accelerating, the trend of open innovation is also picking up speed. This makes perfect sense because at a time when innovation is essential to the success of every business, few companies can afford to follow the traditional “closed innovation” model that rejects any ideas that were “not invented here.”
The foremost expert on this subject is Henry W. Chesbrough, who is a consultant and a professor at University of California at Berkeley’s Haas Business School, where he runs a center on managing innovation. He has written extensively about this in his excellent book, Open Innovation: The New Imperative for Creating and Profiting from Technology.
Chesbrough calls the old paradigm for creating new ideas “Closed Innovation.” Here are some of the implicit rules of Closed Innovation:
We should hire the best and the brightest people, so that the smartest people in our industry work for us.
To profit from R&D, we must discover it, develop it, and ship it ourselves.
If we discover it ourselves, we will get it to market first.
The company that gets an innovation to market first will win.
We should control our intellectual property, so that our competitors don’t profit from our ideas.
In the last years of the 20th century, at least four factors combined to erode the underpinnings of Closed Innovation.
One factor was the growing mobility of highly experienced and skilled people. When people left a company, they took their knowledge to their new employer.
Another factor was the growing presence of private venture capital, which specialized in creating new firms that commercialized external research. Often, these start-up firms became formidable competitors for the established firms that financed most of the R&D in the industry ? the very ideas these new companies fed off of as they competed for industry leadership.
The third factor was the increasingly fast time to market for many products and services, making the shelf life of a technology ever shorter.
The fourth factor was the increasing knowledge of customers and suppliers, which further challenged the firm’s ability to profit from their knowledge silos.
As Chesbrough explained in a recent National Post article, a company that uses closed innovation focuses on itself. Therefore, it refuses to consider opportunities from outside the company. Moreover, it is even likely to ignore many of the best ideas it develops internally because they do not fit neatly into the current business model.
This was the case at Xerox’s Palo Alto Research Center, where the Ethernet, the mouse, and the first graphical user interface were designed ? and then ignored by the parent corporation. Because Xerox viewed itself as a company in the photocopying and printing business, it left the development of its innovations to companies like Apple and Microsoft.
As Chesbrough points out, this trend isn’t limited to high-tech companies. It extends to such industries as automotive, health care, banking, insurance and consumer packaged goods.
For example, Procter & Gamble has long relied on its own research and development for the success of its products. But now the conglomerate has shifted its innovation strategy to embrace ideas from other companies. This new mindset is reflected in its new slogan, “Connect & Develop.”
To make that strategy a reality, P&G is pursuing an objective of sourcing 50 percent of its innovations from outside the company in five years. This is a quantum leap from an estimated 10 percent this year. To oversee this effort, the company appointed an executive to a new position, called the Director of External Innovation.
One of P&Gs biggest hits in recent years was a product called the Crest SpinBrush, a motorized toothbrush that costs $5. The SpinBrush is now the top-selling toothbrush in the U.S. It was not developed by P&G researchers, but by a team of entrepreneurs in Cleveland who had previously invented and marketed a battery-operated spinning lollipop.
At the same time that P&G is letting good ideas into the business from outside the company, it is also allowing its own innovations to be used by outsiders. A new policy requires that any idea that it develops and does not use within three years will be available to other businesses, including rival firms. The company has decided that it makes more sense to earn a licensing fee from a good idea than to let the concept languish in desk drawer.
This perspective suggests some very different organizing principles for research and for innovation. These principles of open innovation are:
Not all the smart people work for us. We need to work with smart people inside and outside our company.
External R&D can create significant value, but internal R&D is needed to claim some portion of the value.
We don’t have to originate the research to profit from it.
Building a better business model is better than getting to market first.
If we make the best use of internal and external ideas, we will win.
We should profit from others use of our intellectual property, and we should buy others IP whenever it advances our own business model.
Does the success of companies like Procter & Gamble indicate that open innovation is the wave of the future for every company? Consider the following forecasts:
First, we believe that many industries will transform their approaches from closed to open innovation. In such businesses as photocopiers, computers, disk drives, semiconductors, telecommunications equipment, pharmaceuticals, biotechnology, and communications systems, key innovations are coming from surprising outside sources. In fact, Chesbrough’s analysis shows that the focus of innovation in these industries has moved from the largest companies to various start-ups, universities, and other outside organizations.
Second, we predict that certain industries will never make the move to open innovation. Chesbrough cites the nuclear-reactor industry as a classic case of an industry that is firmly in the grasp of closed innovation. It relies on internal ideas, and has little labor mobility, scarce venture capital, few start-ups, and relatively little research is being conducted at universities.
References List :1. Open Innovation: The New Imperative for Creating and Profiting from Technology by Henry W. Chesbrough is published by Harvard Business Review. ⓒ Copyright 2003 by the President and Fellows of Harvard College. All rights reserved.2. National Post, August 11, 2003, "The New Spin on Innovation: In the Search for Winning Ideas, Companies in All Industries Are Starting to Look Beyond Their Own Resources," by Henry W. Chesbrough. ⓒ Copyright 2003 by Can West Global Communications Corp. All rights reserved. Reprinted from Sloan Management Review, 2003. ⓒ Copyright 2003 by Massachusetts Institute of Technology.
