WHAT IS OPEN INNOVATION?

Recently, there has been a lot of talk about open innovation. It has become an important buzz word, but what does it really mean? Dr. Henry Chesbrough has developed the idea of open innovation, and is a promoter of the concept. His book “Open Innovation: The New Imperative for Creating and Profiting from Technology” is perhaps the best book on the subject, and is a very good read.

Before discussing the concept of open innovation, it’s useful to first briefly talk about innovation itself. Innovation is about more than just invention. It goes beyond invention, to actually commercializing a product and taking it to the marketplace. Many inventions, even those that are patented, never make it beyond the lab, even though they may be ingenious ideas. Innovation requires not only innovative technology, but also innovative business models to take it to market and make it successful. The concept of disruptive innovation is used to describe innovation that not only reaches the market, but changes it completely, such as the car, the telephone and the internet.

Innovation is vital for companies in order to stay ahead of their competitors, by offering new products and improving their business models. The traditional way that companies performed innovation over the past century is often termed “closed innovation”. Under this paradigm, the most successful companies were those that made large investments in performing internal research and development. This allowed them to have a constant stream of innovative ideas that they used to develop new product offerings. They also invested heavily in Intellectual Property protection to prevent their competitors from benefiting from this internal R&D. The leading companies in each sector were those that spent the most amount of money on research activities, including running state of the art labs and hiring the best technical resources. It was difficult for smaller companies to compete with the established players.

This paradigm started to fail towards the end of the twentieth century, for a number of reasons. Highly skilled and qualified employees were becoming more mobile, moving from one company to another and taking their wealth of experience with them. Furthermore, the availability of VC (venture capital) funding to startups encouraged more employees to leave large research organizations and start their own companies. Large companies could not commercialize all of the technologies developed in their labs. Skilled workers, often after gaining many years of experience working in research labs of large companies, could simply leave and take their knowledge to create a new company to commercialize these neglected technologies. Even worse, these employees could go to an established competitor, and the original company that funded research into these technologies would get no return on their investment.

Furthermore, new technology development tools allowed small companies to better compete with large research labs. Improving communications technology permitted easier sharing and distribution of information and knowledge. The result of all these changes was that startups and small companies were now able to compete and succeed against the incumbents. The closed innovation paradigm was no longer working, and a new paradigm for innovation was starting to develop. This is what is called “open innovation”.

Open innovation embraces the idea that not all technology needs to be internally developed. External ideas can be brought into a company and successfully used in their products. This could be done through licensing technologies, or simply acquiring the technologies, or even the entire companies developing these technologies. Similarly, internally developed technology can be shared externally to generate additional revenue. This can be done through start-up companies, or by licensing technology to external entities.

The open innovation paradigm recognizes the complexity of the world and the wealth of knowledge and technology that is now available from many sources. No longer is cutting edge research limited to a few leading labs, which compete against each other to innovate new products. Research and technology is now available from many sources, and skilled workers move frequently between companies and research organizations. Given these new realities, it is no longer possible to maintain the closed innovation paradigm described earlier.

It is rather inevitable to move towards open innovation, and companies are slowly and cautiously moving in this direction. However, they are understandably very careful so that they don’t damage their existing business models. While it may take some time, the shift towards new and innovative business models is underway. Companies that fail to innovate will likely not be able to compete with the fast paced developments happening today. This is why it is critical to understand open innovation, embrace its teachings and learn how to use it effectively.