The Genesis

So, why would an English clockmaker and an American aviator, who lived two centuries apart, figure in the genesis of open innovation? Non-connected though it seems, their greatest achievements, the invention of the marine chronometer and the first non-stop solo flight across the Atlantic from New York to Paris were both achieved within the framework of an open innovation model. Harrison was the winner of the £14,315 Longitude Prize, offered by the British Government in 1714 to anyone who could develop a method of determining a ship’s longitude. Lindbergh was motivated by the Orteig Prize, offered by a New York Hotelier by the same name and which would award $25,000 to the first aviator who could fly non-stop between New York and Paris.

The word “Open Innovation” was first used by Prof. Henry Chesborough of the Haas School of Business at the University of California at Berkeley in his path breaking 2003 book, Open Innovation: The new imperative for creating and profiting from technology. However, the idea and discussion about some consequences (especially the inter-firm cooperation in R&D) have been used in industry to some extent since the 1960s. Prof. Chesborough went on to write two more books on this subject as well as found the Centre for Open Innovation at the Haas School, which is now acknowledged as a driver in this stream of thinking.

One of the projects he did there tracked 35 projects that started inside of Xerox’s labs and got to a certain level of development, but then internal funding for all these projects was stopped. He was curious as to what happened to these projects. Most of the 35 projects, when they went outside, subsequently failed.

But a few of them succeeded and actually became publicly traded companies, and if the market value of those publicly traded spinoff entities were added, it more than exceeded the value of Xerox’s own market value. In the example of Xerox, their core business models were doing a good job of commercializing certain technical projects; the ones that didn’t fit with the core, but when they exited to the outside found different business models that made them much more attractive as standalone entities. This became the genesis of Open Innovation.

The Paradigm (Chesborough, 2006)

The open innovation model differs from the closed model, where research and development is internal, leading to products which are completely made ready in-house and then distributed for external customers by the company. In contrast, open innovation utilizes input and output of knowledge in order to enhance a company’s innovation process as well as to expand the markets for this increased innovation. It assumes that companies should use both internal and external ideas, as well as internal and external paths to market, in the growth of their technology.

Processes which use this paradigm convert internal and external ideas into architectures and systems, and utilize business models to define the requirements for these architects and systems. Research and development is treated as an open system. Valuable ideas can come from outside or inside the company and can go to market from inside or outside the company as well. In effect, external ideas and paths are as important to the company as are internal ones.

The basic paradigm shift is the well-established understanding that knowledge is not restricted to a few silos but is democratized, and even the best R&D organizations must identify, connect to and leverage external knowledge sources as a core process of innovation.

A few typical characteristics of this paradigm are:

Equal importance is given to external knowledge.
The business model is focused on converting R&D into commercial value
The purposeful outbound flows of knowledge & technology.
The abundant underlying knowledge landscape.
The proactive and nuanced role of IP management.
The rise of innovation intermediaries.
New metrics for assessing innovation capability and performance.

Through the years, several reasons have accelerated the widespread acceptance of the open innovation paradigm:

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

The open innovation paradigm is slowly gaining recognition in multiple industries in many avatars. Crowd sourcing, where answers to complex questions are sought through asking a huge and often un-targeted crowd; Open source software like Linux or android where users themselves make significant changes to the software they use are just too such illustration. However, a pattern can be clearly recognized; once the IP issues are resolved , the knowledge based industries are always the ones which adopt and propagate this paradigm the quickest and the most efficient.

The Business Model (Chesborough, 2007)

As shown in Figure 4- Revenue streams for innovation models, open innovation is better for a company’s revenue model in two ways; it reduces the cost of R&D as well as adds to revenue through hitherto unexplored revenue streams. By adopting these models, organizations can bring innovations to market more quickly and less expensively, thereby securing a competitive advantage in an increasingly dynamic global economy.

Implementing an open business model represents a significant cultural break from most corporate traditions and counter-intuitive as we usually tend to work diligently to protect the intellectual property of our organizations.

Until recently, innovation was a function of tapping into internal intellectual resources and nurturing the business while protecting it from outside exposure or interference. Open innovation, by contrast, calls for companies to make much greater use of external ideas and technologies while sharing their unused ideas with others.

This requires each company to open up its business model to let more external ideas and technology flow in and more internal knowledge flow out. It’s critical for CIOs to understand these models’ disruptive implications and provide the infrastructure necessary for their companies to thrive in the new landscape.

Open Innovation Activities

Platforming: This approach involves developing and introducing a partially developed service, for the purpose of providing a framework or tool-kit for contributors to access, customize, and exploit.
Idea competitions: This model entails implementing a system that encourages competitiveness among contributors by rewarding successful submissions. This provides inexpensive access to a large quantity of innovative ideas, and a deeper insight into the needs of 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 design and development: Similarly to product platforming, an organization incorporates its contributors into the development of the product but 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.
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 is used to develop solutions to identified problems within the development process, as opposed to new products.