‘No matter who you are, most of the smartest people work for someone else.’ Sun Microsystems co-founder Bill Joy could hardly have expressed the need for, and power of, open innovation any more clearly. Because no matter how innovative a company might be, there’s always a world of potentially valuable knowledge to be found beyond the confines of its own organisation. Not surprisingly, successful companies are embracing collaboration and teaming up with other businesses to create innovative new knowledge ecosystems. But open innovation does not work for everyone – or in every situation.
The term ‘open innovation’ was coined in 2003 by Henry Chesbrough, an organisational theorist and adjunct professor at the Haas School of Business at the University of California. Chesbrough continues to publish on the topic of open innovation today, which he defines as 'a distributed innovation process based on purposively managed knowledge flows across organizational boundaries.'
According to Marcel Bogers, a Garwood Research Fellow at the Haas School of Business who regularly collaborates with Chesbrough, this means that open innovation involves the use of purposive inflows and outflows of knowledge which is valuable to the organisation. Bogers: ‘The purpose might be to accelerate the internal innovation process – also known as inbound or outside-in open innovation – though the reverse is possible as well. In the latter case, an organisation sets out to find external buyers or partners who can build on ideas, knowledge or technology developed in-house, in a way that will ultimately also be profitable for the organisation itself. This is also known as outbound or inside-out open innovation.’
In theory, then, any organisation that has embraced the open-innovation model therefore has both inflows and outflows of knowledge. In reality, says Vareska van de Vrande, Professor of Collaborative Innovation and Business Venturing at Rotterdam School of Management, many organisations tend to mainly source their knowledge from outside the company. ‘It’s very important for companies to always keep developing knowledge in-house, as this opens them up to all the valuable opportunities all around them. Still, many companies struggle with the idea of sharing knowledge that’s of no immediate use to them with third parties that will take this knowledge and improve on it – sometimes by acquiring a licence, sharing a portion of the profit, or paying a one-off fee. The natural impulse tends to be: we need to carefully protect our intellectual property to prevent others from making a profit off of it.’
Part of business strategy
Yet there are numerous examples of outbound open innovation, Van de Vrande says. She cites Tesla as an example, which made its patents available to use for free by other automobile manufacturers back in 2014. Van de Vrande: ‘Musk recognised early on that Tesla would benefit more from the overall growth of the market for electric vehicles than if he would simply hold on to all those patents.’
Either way, Van de Vrande regards the choice of open innovation as strategic: ‘It involves a lot more than simply hosting occasional co-creation sessions with suppliers or clients,’ she says. ‘The company really needs to be convinced that it absolutely needs the input of third parties, and have a very clear idea of the ecosystem used by those parties. I therefore see open innovation as part of a deliberate business strategy, so as to be able to make maximum use of both internal and external capabilities.’
According to Bogers, who also teaches at the University of Copenhagen’s department of Innovation & Entrepreneurship, it is also very important for organisations to have the right internal competencies to engage in effective open innovation. He continues: ‘I’ve seen a lot of examples of companies that were interested in using external knowledge, only to find out their internal processes weren’t set up for that at all. So it appears you need to have certain mechanisms in place to be able to truly benefit from open innovation: your employees need to be open to outside ideas, there must be a certain willingness to share some of your own knowledge, and your business model must be such that you can market successful innovations based on that external knowledge. My co-author Joel West and I have described this as the process model of obtaining – integrating – commercialising, where each of these steps is important when it comes to making that external knowledge worth your while.’
It is for this reason that Bogers states that open innovation is not necessarily suited for all industries or all types of companies. Van de Vrande agrees: ‘Everyone in the organisation needs to be aware of the importance of working with entities outside the organisation. R&D departments, in particular, are notorious for their not-invented-here mentality. Your organisation also needs to know how to handle cultural differences – the reason collaborations between large companies and start-ups have tended to fail in the past.’ Bogers: ‘It helps to be part of an innovation hub, valley, or other, wider knowledge ecosystem. The experience of learning to open up can also be very dynamic and exciting for an organisation. A lot of companies need to get used to the idea of being dependent on others and having to deal not only with their own business models but those of other organisations as well.’
As Van de Vrande sees it, open innovation is most valuable when companies from different sectors and industries work together. ‘We see a lot of open innovation in the development of driverless cars, since that requires so many different technologies that no single company can handle it all – not even Google. You really need state-of-the-art knowledge of cameras, sensors, cloud computing, human-machine interface systems, operating systems, and so on and so forth. An open-innovation model allows you to integrate all these different types of expertise and significantly reduce both costs and time-to-market in the process.’
Bogers cites Danish beer producer Carlsberg as an example of a company that has had open innovation in its DNA for generations, and manages to use this successfully. ‘Carlsberg wanted to create a biodegradable beer bottle, but they soon realised they didn’t have the knowhow required within the organisation. So they shared their plan with people worldwide and asked which companies would like to get on board. They eventually teamed up with a number of Danish and Swedish companies and the Technical University of Denmark to develop their revolutionary Green Fiber Bottle, the world’s first beer bottle made from sustainably sourced wood fibre. Open innovation can be especially valuable in an area such as sustainability, where existing alternatives often need to be radically overhauled.’
Van de Vrande feels DSM is a role model when it comes to using open innovation. ‘They have been applying the principle for a long time; it’s actually part of their strategic agenda and supports their transition from a bulk chemical company to a major player in nutrition, health and sustainable living. It’s also a good example of a company that’s working successfully with a lot of different start-ups and actively invests in young companies offering technologies of interest to DSM. They have demonstrated that open innovation really makes a difference.’
DSM’s 5 key success factors of open innovation
1. Entrepreneurial context
Look at innovation from the broadest possible perspective and make maximum use of national and regional innovation incentives: not just financial resources, but also management support, tax benefits or regulations.
2. Fair market valuation
Before entering into a partnership with a start-up, valuate the company as accurately as possible. DSM has learned that it is more efficient to develop all potential scenarios and conduct a real-options analysis rather than using only the traditional valuation methods (including Net Present Value and cash flow analysis).
3. Goal-oriented partnering
Determine in advance for what specific purpose you are setting up a partnership with external partners. Outsourcing less strategic operations to specialised companies calls for a different type of collaboration than entering a new market together with an alliance partner or securing additional R&D capabilities in a problem area.
4. Knowledge transfer
Make sure that knowledge exchange between partners in the innovation process leads to a result that gives both parties what they need. A strong Intellectual Property policy is obviously essential in this process.
5. Responsive culture
Scientists are good at coming up with new ideas, but developing an idea into a viable project requires a completely different type of ‘intrapreneurial’ management, where risks are not avoided and a fast decision-making process is encouraged. In the next stage, when the project has grown into a real company, there is a need for managers who focus more on processes and on mitigating risk. Innovative companies need to have a culture that leaves room for these different management styles.