Deconstructing Open Innovation

Chances are high that you were at a conference or read an article recently that referenced how a company discovered new value by adopting Open Innovation. You might have wondered whether it’s relevant to your organization and perhaps asked how to go about investigating its value for your business. Today, we’d like to take a moment to deconstruct open innovation with the goal of highlighting its value and pitfalls.

What is Innovation? We define innovation here.

Traditional vs. Open Innovation

Traditional Innovation is said to be the reliance on internal resources to solve problems or capitalize on opportunities.

Oftentimes this is referred to as the “not invented here” approach, which is to say a firm only uses internal resources for all aspects of their services or products. Generally speaking, traditional innovation came out of vertically integrated organizations with internal research, design and development. When faced with the common "build or buy" decision, a traditional innovation firm would opt to nearly always build with the additional caveat of leveraging only internal resources.

Open Innovation, on the other hand, is the reliance of internal and external resources to enhance internal innovation with the goal of gaining market penetration.

In 2003, Henry Chesbrough wrote a book called Open Innovation. In his words, “Open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology”.

The central idea behind open innovation is that in a world of widely distributed knowledge, companies can't afford to rely entirely on their own research, design and development. Instead, considerations must be made for leveraging processes, tools or inventions from other companies. In parallel, internal inventions that are idle should be taken outside the company through licenses, spin-offs or joint ventures.

Open Innovation encourages the exploration of a wide range of internal and external sources, integration of this exploration with organizational capabilities and resources and finally the exploitation of these opportunities through multiple channels. At inception, open innovation was a theory based on observations made within global organizations with established R&D business units. These teams created intellectual property in the form of patents and inventions many of which ended up sitting on a shelf collecting dust.

Open Innovation for SMB's?

In a recent conversation, we wondered to what extent, if any, is it relevant to small and medium enterprises. First, we took a look at a number of the commonly discussed disadvantages of open innovation.

Risks & Challenges

The disadvantages of implementing a model of open innovation is associated with a number of risks and challenges, including:

  • exposing a company’s internal distinctive competencies
  • employee resistance to innovation and change, poor understanding of their role
  • insufficient expertise of partners may entail costs and barriers to the desired outcome
  • volatile or ambiguous industry regulations
  • lack of financial capital to support open innovation
  • increased complexity of controlling innovation and regulating how contributors affect a project
  • realigning strategy so that it extends beyond the firm in order to maximize the return from external innovation

Benefits & Value

On the other hand, open innovation offers several advantages to companies:

  • reduced the cost of product research, development and process improvement
  • accelerating time to market for new products
  • improving product quality
  • incorporating customers early in the process
  • accessing external knowledge not possessed within the firm
  • increase in accuracy for market research and customer development
  • potential to leverage internal and external innovations

Key Thoughts

We believe that there is value in taking a closer look at Open Innovation as it relates to SMB's in order to determine how best to balance the risk of action verses inaction. It's conceivable that a lack of "dusty" patents doesn't preclude a company from leveraging Open Innovation perspective to build more value for a SMB. If you're interested in having a conversation about Open Innovation, drop us a note, we'd love to hear about your experiences.

photo credit: Open Source CC license