What exactly is Open Innovation?

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Despite thousands of companies around the world using open innovation, there is still some confusion about what exactly is Open Innovation.

In this post, I’ll define open innovation once and for all, and will take you through some of the ways you can use it to generate valuable ideas and solutions to tough problems.

A quick definition of open innovation

Open innovation is the practice of businesses and organizations sourcing ideas from external sources as well as internal ones. 

This means sharing knowledge and information about problems and looking to people outside the business for solutions and suggestions.

In practice, open innovation can take the form of established partnerships like Delphi and Mobileye working on autonomous driving systems, through to co-creation competitions like the BMW startup challenge, and crowdsourcing portals like the ‘My Starbucks Idea’ platform. 

Instead of the secrecy and silo mentality of traditional business R&D, open innovation invites a wider group of people to participate in problem-solving and product development.

Starbucks
My Starbucks Idea – an example of open innovation. Source: SMBP

Open innovation isn’t just a one-way street, either. By inviting others to participate in generating ideas for products and services, companies can also share information and expertise with communities of fans and customers.

Where does the idea of open innovation come from?

Businesses and organizations have always invited feedback from the wider public for suggested improvements to their products and services.

However, the modern concept of open innovation was coined in the early 2000s by writer Henry Chesbrough.

Chesbrough, a UC Berkeley professor and Silicon Valley veteran, wrote the seminal 2003 text Open Innovation: The New Imperative for Creating and Profiting from Technology. For modern businesses, this is the go-to source for open innovation insights.

Henry Chesbrough’s definition of open innovation

In his book, Chesbrough defines open innovation as “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation”.

Open Innovation 2.0 Conference 2016
During the Open Innovation 2.0 event several topics have been discussed, like European Innovation Living labs; Innovation Ecosystems; OI2 funding opportunities under Horizon 2020; Online Engagement Platforms (Big Data, Cloud, IoT, participatory design); etc.

According to Chesbrough, “open innovation is a more distributed, more participatory, and more decentralized approach to innovation.” This approach is a great way to access external knowledge and to find new ways of doing things.

This decentralized approach creates a lot of advantages for businesses.

The advantages of open innovation

As Chesbrough notes in Forbes, open innovation offers companies a way to access knowledge and expertise from beyond their internal resources. Doing this can unlock a lot of advantages. 

Expanding the pool of ideas

Open innovation gives businesses and organizations the ability to access new (and sometimes left-field) ideas for new products and services. 

As Chesbrough notes, “useful knowledge today is widely distributed, and no company, no matter how capable or big, can innovate effectively on its own.”

By casting the net wider, companies can end up with solutions they’d never have thought of otherwise. For example, Starbucks might never have invented the humble cake pop on its own.

In companies of all sizes, groupthink can limit the way companies identify new ideas for products and services. By inviting a wider range of viewpoints, companies can find novel solutions to tough problems.

Lowering innovation costs

Smart thinkers tend to be expensive. With open innovation, companies can access new ideas without having to include a whole new division of engineers and developers on their payroll.

However, companies still need to reward great suggestions. If you’re inviting people to submit ideas, you need to create the right incentives for people, such as cash prizes, a share of sales, or professional recognition. 

Going to market faster

Open innovation can speed up product development significantly. By asking a wider group of people to contribute their ideas and expertise, businesses can identify and solve problems a lot faster and can refine their products.

This is particularly helpful in areas like software development or app testing, where final products are found through iterative testing. 

Boosting product visibility

When done well, open innovation can drive a lot of new interest in a product, service, or company. For example, by investing in the Lego Ideas platform, Lego was able to generate a huge amount of coverage for fan-developed sets, and also gained a lot of media coverage.

Attracting potential investors

Participating in open innovation can lend a lot of credibility to a growing company, and can be a great way to attract new business interest from investors such as venture capital firms. 

By sharing information and expertise with others outside the business, you can do a lot to boost the profile of your company – providing you don’t share so much that it affects your competitive advantage.

Taken together, these factors can create a strong advantage for businesses. 

However, open innovation isn’t all plain sailing – there are some challenges involved, too.

The challenges of open innovation

Open innovation provides businesses and organizations with powerful new ways to find ideas.

However, as the Harvard Business Review notes, many businesses aren’t taking the time to invest in open innovation. In part, that’s because of the challenges involved.

Open innovation can be costly

Open innovation can take a lot of time and effort to manage effectively. Companies need to manage the process closely to make sure the exercise is consistent with brand values. 

For growing startups, this kind of expense can make open innovation a real challenge.

The intellectual property question

There’s also the question of intellectual property. If open innovation results in a successful, world-changing invention, who should share in this success? The company, or the person suggesting the idea? You need to set clear rules about this.

As open innovation involves sharing information, it may not be appropriate for more sensitive projects. For example, companies should be wary of divulging information that could have a negative impact on company reputation or value. 

Businesses need a culture shift

Open innovation also requires a culture shift from those inside the business.

As the Harvard Business Review notes, many of the reasons companies don’t pick up crowdsourced innovations come down to a ‘not invented here’ mentality: some people simply have a hard time adopting external ideas.

Open innovation requires a different management approach

Open innovation requires a different approach to project management. Businesses need to let go of the idea of ownership and control of the innovation process and open up to external paths for new technologies, and new sources of innovation.

As Chesbrough notes, “open innovation involves actors that fall outside of traditional supply chains, such as universities or individuals. These participants can be influenced, but are often not actually managed.” This requires an attitude shift for project managers.

Another key requirement? Setting clear rules.

Why you need to set clear rules for open innovation

For open innovation to work, you need clear rules and expectations to guide the process. These rules aren’t just useful for the fans and customers participating – they also help you to know exactly what to expect from the process. 

These rules should set out:

  • The problem or question at hand: Before wider communities of thinkers can contribute their best ideas, they need to know what they’re dealing with. You need to give clear and accurate information about the problem you’re trying to solve. 
  • The incentives available: People like to be rewarded for their ideas. So, to get the most transformative suggestions, you need to offer something in return. This can take the form of a financial reward, professional recognition, or valuable publicity.
  • Intellectual property expectations: You need to set out who will own the intellectual property if your company decides to adopt an innovation as the result of open innovation. This is crucial to give participants confidence in the process.
  • How – and when – people should submit ideas: If you’re asking people to submit their best ideas, they need to know the desired format to do so, including any deadlines.

Open innovation vs. closed innovation

Closed innovation is when a company innovates purely using internal R&D processes, with an inside-out approach.

Open innovation challenges the idea that creativity must come from within a business.

Instead, companies doing open innovation seek external ideas with an outside-in approach.

That’s the key difference between the open innovation model and closed innovation.

Visually, these two innovation management approaches look like this:

Closed Vs Open Innovation
Closed vs. open innovation. Source: Research Gate

They involve different considerations for businesses.

In closed innovation, a company is leveraging internal ideas. It has clear control over projects and can determine when – and how – they go to market. 

In the case of open innovation, companies have less control over projects and ideas. These external ideas can be picked up by other companies, or can even find their way to new markets via other parties.

If you’re developing a sensitive or commercially valuable idea – such as a patent for an unreleased product – then open innovation might not be appropriate, as it could result in a loss of intellectual property.

How you can use open innovation

Depending on your industry, your innovation strategy, and your appetite for involving external parties, you can use open innovation in different ways.

If you’re part of a small company, a simple customer ideas portal might be the best form of open innovation for you. This kind of crowdsourcing tool is a low-cost, low-risk way to ask your customer community to contribute ideas for products and services.

If you’re part of a larger company, you may have access to more of the resources necessary to manage a formal open innovation process, such as an innovation contest, a dedicated customer co-creation project, or public joint ventures. 

Your appetite and capacity to use open innovation will depend a lot on your business model, too. If your profitability depends to a large extent on commercially sensitive information, then open innovation may be too risky.

Seven common open innovation models

#1) Challenges

Companies can set innovation challenges to gather ideas and find solutions. These can either be public events where anyone is able to contribute, or they can be private with specifically selected partners. 

Innovation challenges can be defined to solve a specific problem that is already well-identified, such as Unilever’s innovation portal seeking solutions to problems with the storage, packaging, and transportation of food products. 

On the other hand, these challenges can also be broadly defined to encourage participants to submit a wider range of ideas, as with AT&T’s Accelerator Challenge seeking new ways to boost the engineering capabilities of today’s students. 

Innovation challenges are an excellent way to gather new ideas and boost brand visibility.

#2) Startup-corporate partnerships

Partnerships between startups and corporate businesses are another way to work together to find a solution to an identified problem. These partnerships are a great way to draw on the strengths of each company and offer mutual benefits. 

For the startup, these partnerships offer an opportunity to refine a company’s value proposition, work closely with future clients, and be introduced to a wider range of corporates. For growing startups, this is huge. 

Corporate businesses also get access to a competent and well-trained team working on a solution without impacting their internal resources and have a solution tailored to their needs.

These mutual benefits are one reason why startup-corporate partnerships like BMW’s Startup Garage are becoming more popular. 

#3) Startup incubator / accelerator

A startup incubator or accelerator is similar to a partnership, but also involves the corporate business investing equity in the startup. 

Often, the corporate will have an internal team working on the project, with the startup there to help them out with specific knowledge and expertise.

#4) Startup acquisition

When an established business identifies a viable opportunity but doesn’t have the resources, time, or proven capability to take up this opportunity, it may look for startups to acquire. This boosts the business’s innovative capacity without needing to build it from the ground up. 

While there can be a lot of mutual advantage in startup acquisitions, these can also result in a loss of competitive advantage. That’s because with a big enough offer, any major established business can buy a promising startup.

#5) Hackathons

Hackathons are similar to innovation challenges, but also go far deeper into the project details – often as far as the minimum viable product phase.

The goal with hackathons is to work as fast as possible, channeling creative expertise and knowledge to create momentum in a very short period of time. 

As hackathons are short, communal exercises, they tend to make communication a lot easier. They can also be great ways to boost brand visibility or vet potential hires, as in the case of Facebook’s now famous hackathons.

#6) Intrapreneurship

Intrapreneurship is a great way to find innovative talent within an established business. Unfortunately, as a concept, it isn’t all that well understood by the majority of companies. 

Intrapreneurship seeks to identify those employees with a startup mindset and provide them with the support, funding, and mentorship they need to solve tough problems. 

This idea recognizes that businesses don’t always have to look outside of the business to innovate. Sometimes, the resources are already ready and waiting.

#7) Co-Creation labs

Co-creation labs can be either internal to a business or convened externally alongside employees, customers, and other partners. 

Co-creation labs are places dedicated to innovation, with the resources, mentoring, and knowledge people need to explore challenging questions. 

A great example here is Fuji-Xerox’s Customer Co-Creation Laboratory in Yokohama, Japan. Here, Fuji-Xerox employees work alongside customers, experts, and fans to explore new possibilities to apply the company’s technology and resources.

Open Innovation examples

Clearly, we think open innovation is great. 

But you don’t have to just take our word for it! Take a look at the way these industry leaders are investing in open innovation as a source of new innovation. 

  • Lego: The Lego Ideas platform has created a direct line for fans to suggest great new ideas for Lego sets, with the company releasing a bunch of new products every year. This has helped drive increased sales and cemented Lego’s community of fans. 
  • Procter and Gamble: P&G’s ‘Connect + Develop’ initiative allows individual inventors or businesses of all kinds (startups, small businesses, and even Fortune 500 companies) to develop valuable patents alongside company product engineers.
  • Unilever: Unilever’s open innovation portal lists technical challenges facing the company (for example, oil oxidation prevention), and asks engineers, inventors, academics, and designers to contribute their best potential solutions to these.

Get the best ideas with open innovation

No matter what industry you’re in, you can’t survive without access to information and expertise beyond your business. Instead of relying solely on internal know-how, you need a way to access ideas and solutions from new sources.

Open innovation can be an excellent way to gather the best ideas the world has to offer and to solve the hardest problems you may face. 

By looking beyond your business for solutions to difficult problems, you can generate valuable ideas, expose yourself to different sets of expertise and capabilities, and even boost your public profile with customers and investors. 

However, open innovation takes time and effort to get right. Not only do you need to set clear rules for the process, but you also need to dedicate the time and resources necessary to oversee the process and manage public interactions. This can be tricky. 

Get it right, however, and open innovation can unlock amazing new ideas and solutions.