What is open innovation?
Informally, open innovation is the idea that companies should make greater use of external ideas and technologies in their own business, and allow unused internal ideas to flow out to others for use in their business. It is the antithesis of a closed innovation process which relies on internal R&D and deep vertical integration.
More formally, “open innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively” (source: Open Innovation: Researching a New Paradigm, by H. Chesbrough, W. Vanhaverbeke and J. West, Oxford University Press, 2006, p. 1).
Hasn’t open innovation been around for many years? What’s new here?
Open Innovation certainly is informed by a wealth of prior research on innovation. Prominent inspirations for open innovation include:
- Wesley Cohen and Daniel Levinthal’s work on absorptive capacity, and the two faces of R&D
- Ashish Arora’s work with Fosfuri and Gambardella on Markets for Technology
- Annabelle Gawer’s work with Michael Cusumano on Platforms and Innovation
- Clay Christensen’s work on disruptive technologies and disruptive innovations
- David Teece’s work on profiting from innovation, especially appropriability and complementary assets
However, there are a number of points of differentiation for Open Innovation, in comparison to prior theories of innovation.
- Equal importance is given to external knowledge in innovation, in comparison to internal knowledge
- The business model plays a central role in open innovation to convert R&D into commercial value
- Open Innovation explicitly considers Type I and Type II measurement errors (in relation to the business model) in evaluating R&D projects. Type II errors are a primary rationale for encouraging “inside out” innovation.
- The purposive outbound flows of knowledge and technology, vs. traditional analysis of “spillovers”
- The abundant underlying knowledge landscape
- The proactive and nuanced role of IP management in the open innovation process
- The rise of innovation intermediaries, as part of enabling markets between “R” and “D” in R&D. For those who want to read more, consult Chapter 1, pages 8-11 of Open Innovation: Researching a New Paradigm, by H. Chesbrough, W. Vanhaverbeke and J. West, Oxford University Press, 2006.
Isn’t open innovation the same as open source software?
“The open innovation paradigm treats research and development as an open system. Open Innovation suggests that valuable ideas can come from inside or outside the company and can go to market from inside or outside the company as well. This approach places external ideas and external paths to market on the same level of importance as that reserved for internal ideas and paths to market in the earlier era.”
“Open Innovation is sometimes conflated with open source methodologies for software development. There are some concepts that are shared between the two, such as the idea of greater external sources of information to create value. However, open innovation explicitly incorporates the business model as the source of both value creation and value capture. This latter role of the business model enables the organization to sustain its position in the industry value chain over time. While open source shares the focus on value creation throughout an industry value chain, its proponents usually deny or downplay the importance of value capture.”
Source: Open Innovation: Researching a New Paradigm, H. Chesbrough, W. Vanhaverbeke and J. West, (Oxford University Press, 2006): pp. 1-2
Why are business models important to the concept of Open Innovation?
Business models are the means through which the latent economic value of ideas and technologies are realized in the market. Organizations filter information through the lens of their business model, implicitly favoring the information that supports the business model, and discounting any information that does not fit. Open Innovation recognizes that because of this bias, ideas and technologies are not viewed identically across different organizations. Rather, companies select FOR projects that fit and REJECT ideas that do not fit.
Open Business Models: How to Thrive in the New Technology Landscape by H. Chesbrough (Harvard Business School Press, 2006) discusses business models in detail, particularly how to innovate business models.
Is crowdsourcing open innovation?
Crowdsourcing is a means of opening up the process of searching for good ideas outside the firm. It is only one such means of many (working with universities, collaborating with users or suppliers, or inlicensing technologies) are some other ways to search externally for good ideas.
Nonetheless, crowdsourcing is popular these days, and companies like Innocentive, who describe themselves as “the leading Open Innovation company”, are exemplars of crowdsourcing. So there is a connection between the concepts.
Is open innovation only applicable to technology-based companies?
The initial research supporting the open innovation concept was developed in technology-based companies. But more recent research has extended the concept to a variety of industries outside of high-tech, such as consumer package goods and financial services.
What does open innovation mean for services?
Henry Chesbrough’s next book, Open Services Innovation: Rethinking your business to grow and compete in a new era, (Jossey Bass, 2011) is focused precisely on answering that question. The book comes out January 18th, and is already available for pre-order at Amazon.com.