Open innovation is a business strategy to advance technology by fusing external ideas and products with internal research and development. It is a way for businesses to minimize costs and create products more efficiently. However, choosing the right path can be difficult, as organizations must weigh the benefits and liabilities of using outside help against developing technology internally.

The practice of open innovation emerged near the end of the 20th century in response to difficulty organizations were having controlling proprietary ideas and expertise. The increasing number and mobility of employees, and the growing availability of private venture capital, made it possible for people with ideas to commercialize them outside corporate offices. As a result, firms that historically invested heavily in R&D and closely held intellectual property began to realize that they should look externally for ideas and products.

Today, open innovation transforms the boundary between corporations and the outside world. Firms in many industries are experimenting with relinquishing control of the innovation process in exchange for better use of internal resources and a broader range of ideas.

Best practices

Open innovation can be integrated into a business strategy depending on a company’s needs and resources. Organizations often solicit ideas from the general public through corporate initiatives or contests, or they partner with a highly specialized intermediary firm to identify and develop ideas for purchase.

Examples include Dial’s “Quest for the Best” contest, which invited contestants to submit patented or patent-pending ideas in various product categories. Proctor & Gamble’s Connect + Develop program uses online R&D markets to identify ideas and technology from independent inventors. P&G also supports open innovation by offering ideas to outside firms if an internal unit does not use them within three years of conception.

Another open-innovation example is Nokia’s Concept Lounge, an interactive forum that collects innovative and futuristic product concepts from independent designers. Other intermediary forums, such as InnoCentive, NineSigma and yet2, match companies with promising ideas or patents.

Organizations can offer financial support to innovation benefactors, providing research funding and focusing on early stages of research discovery. Intel Capital, for example, is a vehicle for microchip-maker Intel to invest in startups and spur innovation that enriches its business. The National Science Foundation offers federal support through awards and grants to academic institutions.

Beyond identifying ideas, organizations seek to generate external innovation as part of their open-innovation strategy. Computer operating system Linux is an example of innovation developed to serve a cause, rather than for financial profit. Linux has evolved through unpaid efforts of an informal network of computer programmers, corporate and independent, who advance technology for user benefit.

Another example of fostering external innovation is AppExchange, created by Salesforce. It’s an online marketplace for developers to create and sell software that complements Salesforce’s system. It also allows the firm to attract acquisition targets and easily track applications without funding their development. In addition to AppExchange, Salesforce established an in-house incubation service for external ventures that provides support to developers.

Organizations also partner with innovation intermediaries, such as idea scouts, that screen ideas from the inventor community and review them for commercial potential. Patent brokers bring together investors and firms interested in commercializing patents, and licensing agents broker the licensing of technology, rather than their sale. Finally, invention capitalists purchase patents from inventors and sell them to companies, sometimes bundling patents related to a particular market opportunity.

Choosing the right approach

As with any business decision, companies should begin by assessing their capabilities. Companies must determine how much they can spend in the pursuit of ideas, as well as how much time employees can dedicate to concept generation and other open-innovation efforts.

Companies must also examine their organizational culture and evaluate leadership support and staff willingness to cooperate with open-innovation strategies. For example, will employees behave territorially and discount ideas because they were generated externally? Another consideration is whether a company needs to get products to the market rapidly or whether it can spend more time with development and testing.

Customer perception is another important component to an open-innovation strategy. Organizations should evaluate whether their brand will naturally attract innovators. If not, they should expand their reach through an intermediary.

Finally, organizations should consider the environment of their industry. Some industries are highly technical in nature, and the majority of innovation remains focused within corporations. With other industries, innovation has moved from central R&D labs to startups, universities, research organizations and other outside groups.

Big Sky Associates helps organizations choose the right approach to open innovation. With each case, organizations must be able to clearly articulate the need for innovation and define the problem in a way that enables their target audience of innovators to solve it. This approach provides organizations with the best chance of success when developing and implementing an open-innovation strategy.

Big Sky Associates Partner Brad Gates and Consultant April Goldstein contributed.

John Dillard, who has more than 15 years of experience as an analyst and a consultant for large government agencies and Fortune 500 companies, co-founded management consultancy Big Sky Associates in 2006 and serves as president and partner in charge. Dillard leads consulting projects focused on improving the speed and effectiveness of decision making, as well as core processes and functions.

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