Open Innovation – Definition, Benefits & Challenges

Definition of Open Innovation

Open innovation is an innovation management method where organizations commercialize both their own and external ideas. By allowing inflows and outflows of knowledge, organizations can utilize ideas from external parts, and also use ideas generated internally to create value through external channels. Doing so, they can increase their own innovation capacity while at the same time contributing to an ecosystem of open innovation.

The process where an organization uses external parts in order to increase their innovativeness is called the outside-in process. Examples of external parts could be clients, suppliers, competitors. The opposite process, where internal ideas are brought to the outside environment and profited from, is called the inside-out process. This could for example be done by selling intellectual property. A third process is what is called the coupled process of open innovation. This involves joining ventures with other companies and co-creating, meaning that the organization utilizes both the outside-in and the inside-out process in collaboration.

Open Innovation compared to Closed Innovation

To understand open innovation, it is often easier to also understand closed innovation. When an organization uses closed innovation, they keep their ideation processes entirely in-house. All ideas are generated, developed, and commercialized within the organization. No ideas enter, and no ideas leave.

Closed innovation can sometimes be a good option, for example when handling vital information that cannot be leaked. However, when working with closed innovation, spillovers occur from internal R&D work when the organization does not have the capacity to make use of ideas. They also miss out on the widespread information out there for organizations that do work with open innovation, meaning they fall behind. This is the reason that organizations now are switching to an open innovation mindset.

The picture below visualizes the difference between open and closed innovation. You can see that for closed innovation, internally generated ideas go through the funnel and are refined until they are ready for the organization’s target market.

For open innovation however, the company limits become permeable and ideas can travel through them. Internally generated ideas can leave the company and end up in other organizations or other markets, and externally generated ideas can enter the internal funnel.

Henry Chesbrough and Open Innovation

The concept of open innovation was popularized by Henry Chesbrough in 2003, in his book “Open Innovation: The New Imperative for Creating and Profiting from Technology”. There he describes how there has been a shift from the more traditional “closed” approach to a more “open” one.

He describes it as “…a model where organizations commercialize both their own and external ideas through purposive out and inflows of information” which is the same definition widely used today.

Photo credit: Sebastiaan ter Burg via Wikipedia Commons

Benefits of Open Innovation

1. Unearthing missed opportunities

One of the key advantages of open innovation is its ability to unearth opportunities that might have been overlooked in a purely internal-focused approach. Often, companies are limited by their internal capabilities and resources, and some ideas may fall outside the scope of their attention. In contrast, the open innovation model enables the entry of new projects at any stage, originating from both internal and external sources. By embracing ideas from diverse channels, businesses can leverage a broader range of concepts and technologies, even those they may not possess, enriching their innovation portfolio.

2. Breaking down barriers

In a closed innovation system, research projects follow a linear trajectory from the firm’s science and technology base, leading to the development and launch of select projects. However, the open innovation model breaks down these barriers by allowing projects to enter and exit the innovation process at various points. This flexibility enables companies to explore unconventional paths to market entry, reaching new audiences and expanding revenue streams beyond their traditional sales channels.

3. Customer satisfaction

Open innovation allows businesses to gain valuable insights directly from customers. By involving customers in the innovation process, companies can better understand their preferences, pain points, and desires, leading to the development of products and services that cater to their needs. By doing this, organizations can achieve better customer retention and satisfaction.

4. Cost efficiency and knowledge integration

Studies have extensively shown the substantial benefits of adopting open innovation. Collaborative innovation across industries has proven to be more cost-efficient, as firms share research and development expenses, leading to reduced costs. Moreover, the integration of external knowledge enhances firms’ absorptive capacity, accelerating the acquisition and accumulation of valuable insights and expertise.

5. A win-win value creation

Furthermore, open innovation fosters a win-win scenario for both organizations and their collaborators. By involving both internal and external actors in the product and service development process, businesses can generate higher value propositions. Value that the organization normally cannot utilize due to their specific situation, can now be gained by their collaborator, and vice versa. This collaborative approach not only benefits the organization but also empowers external partners, incentivizing them to contribute their expertise and knowledge to the mutual success of the project.

Challenges of Open Innovation

1. Maximization of returns from internal innovation

The first challenge revolves around utilizing internal innovation capabilities to maximize returns. Companies must both be able to make use of innovations for internal commercialization and commercialize innovations externally through patents for example. Achieving these multiple uses of internal innovation requires careful strategizing.

2. Incorporation of external innovations

Incorporating external innovations poses its own set of difficulties. The “not invented here” syndrome can hinder organizations from accepting and capitalizing on external knowledge. Overcoming this attitude towards external knowledge becomes crucial, as studies have shown that identifying and making relevant external knowledge available to everyone within the firm presents managerial challenges. Implementing appropriate internal practices and allocating time for innovation within or outside the enterprise are necessary steps to facilitate the successful incorporation of external innovations.

3. Motivating for spillovers and collaboration

The third group of challenges revolves around motivating organizations to engage in open innovation and produce spillovers. The “free-rider” problem arises when parts attempt to capitalize on external innovations without contributing spillovers themselves. Organizations must encourage a culture of collaboration and knowledge sharing to foster a thriving open innovation ecosystem.

Motivating employees to participate in innovation work is another critical challenge. Encouraging them to step outside their comfort zones and connect with new external partners can be difficult, especially when they are accustomed to long-term partnerships. While such partnerships have benefits, they can limit an organization’s ability to explore fresh perspectives and innovative ways of working.

Examples of Open Innovation

1. Procter & Gamble:

Procter & Gamble’s “Connect and Develop” strategy is a prime example of open innovation in action. The initiative launched in 2000 and was at the time one of the first cases of a company successfully collaborating with external partners.

In Procter & Gamble’s case, they collaborate with suppliers, customers, and research institutions, to drive innovation across its product portfolio. According to Procter & Gamble themselves, this approach has led to the development of numerous successful products, more than 2000 global partnerships and improved innovation and productivity for both P&G and the partners involved.

2. LEGO

LEGO’s “LEGO Ideas” platform allows fans and customers to submit their ideas for new LEGO sets. The community votes on the ideas, and when a project reaches 10 000 supporters in the community, it is reviewed by experts to potentially be released in stores. This open innovation approach has resulted in the creation of popular sets that resonate with the LEGO community. Not only does it engage the LEGO fans, but is serves as a market research tool that evaluates the demand for different LEGO sets.

3. NASA

NASA has been actively engaging in open innovation through initiatives like the “NASA Solve” platform that engages the public and diverse communities to solve complex technical challenges. They leverage crowdsourcing and incentive-based competitions to source solutions from individuals, startups, and organizations worldwide. NASA provides monetary rewards and recognition to winners, and sometimes the results are implemented in ongoing space missions. This approach allows NASA to access unconventional ideas and expertise beyond their internal teams.

4. Hyperloop One

When Elon Musk launched the high-speed transportation system Hyperloop, concerns were raised regarding safety and technical feasibility, as well as the profitability of the project. To address these concerns, Hyperloop (called Virgin Hyperloop at the time), in collaboration with SpaceX launched two open innovation programs. The first one was SpaceX’s Pod Competition which focused on the safety technical challenges. The second one was Virgin Hyperloop One’s Global Challenge which addressed the second concern by asking entrants to develop a business plan for launching Hyperloop in different markets.

5. Netflix

Netflix’s open innovation efforts were exemplified by a competition called the Netflix Prize. The company offered a substantial cash prize to individuals or teams that could improve their movie recommendation algorithm by at least 10%. This initiative encouraged data scientists, researchers, and machine learning experts from around the world to participate. The winning team, called “BellKor’s Pragmatic Chaos”, managed to improve the algorithm by 10.06%, thereby receiving the grand prize of $1,000,000.

6. Mozilla

Mozilla’s open innovation strategy consists of an open-source approach to software development. By making the source code of products like the Firefox web browser freely available to the public, Mozilla invites a global community of developers, testers, and users to contribute. Anyone can propose code changes, build add-ons, or report bugs. This open collaboration fosters rapid innovation, increased security, and continuous improvement of their products.

7. Samsung

Samsung is often classed as one of the most innovative large companies in the world. They use their Open Innovation Center (OIC) with the ambition to innovate more like a startup. By building small cross-functional teams, Samsung can achieve the benefits of a small company, meaning agility and producing products that do not have to go through a long approval process. Simultaneously, they have the benefits of being a large company, being able to provide resources.

How to succeed with Open Innovation

1. Define Your Goals and Strategy

Clearly define your innovation goals and objectives. What are you aiming to achieve through open innovation? Are you seeking new product ideas, process improvements, or access to new markets? Develop a strategy that aligns with your business goals and identifies the areas where open innovation can provide the most value.

2. Create a Culture of Openness

Foster a culture that encourages collaboration, knowledge sharing, and external engagement. Promote the idea that innovation can come from both internal and external sources. Create a space where everyone feels involved and motivated to share their ideas. This view is shared by this innovation quote by William McKnight:

“Listen to anyone with an original idea, no matter how absurd it may sound at first. If you put fences around people, you get sheep. Give people the room they need.“

3. Partnerships

Identify the areas where your organization can benefit from external contributions. This could include idea generation, technology scouting, research collaboration, and more. Consider which stages of the innovation process can be opened up to external partners.

Establish connections with external stakeholders, such as startups, research institutions, customers, suppliers, and even competitors. Engage in events, conferences, and networking platforms to facilitate interactions with potential partners that can enrich these areas of your organization.

4. Provide Incentives

One crucial aspect of open innovation is that collaboration should be a win-win for all parties involved. Offer incentives to external contributors, such as rewards, recognition, or even equity participation in the case of startups. Ensure that both parties see mutual benefits in the collaboration.

5. A platform for open innovation

When managing internal and external innovations, challenges can occur in terms of handling ideas.

By using an open innovation platform, external contributors can easily submit their ideas, proposals, or thoughts. Vocean is a powerful tool for open innovation because it makes this involvement of external contributors simple using effective link handling. After inviting people, they can be involved in the entire process, from submitting ideas, enriching and refining these ideas as a group, all the way to creating new innovations and solutions to problems.