In the new open innovation model, company's boundaries are open to external environment, allowing companies to interact with the other actors of the industry. Through this model firms can bring within organization new ideas, created elsewhere, and commercialize them and vice versa. The new approach supports the idea that the site of knowledge and site of innovation do not need necessary to be the same. To do so, companies do not need to lock up IP of its innovations, but they should find ways to profit from other uses of that technology like joint ventures, licensing agreements, multiplying technology by transferring ideas to other companies, and commercialising ideas in different industries. Thank to such approaches the value of innovation is not related just to the final product anymore, but ideas in itself has worth. In fact, they are forming a new market, the market of ideas where everybody can have access. In this regard Chesbrough said:
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"Different companies possess different assets, resources and market positions, and each has a unique history. Because of that, companies look at opportunities differently. They will quickly recognize ideas that fit the pattern that has proven successful for them in the past, but they will struggle with concepts that require an unfamiliar configuration of assets, resources and positions. With innovation markets, ideas can flow out of places where they do not fit and find homes in companies where they do."
Historically, the philosophic driver to innovation was "successful innovation requires control." This approach calls for self reliance: "if you want something done right, you've got to do it yourself". In that closed approach companies needed to develop innovation wholly within the organization, from conception an idea to bring the new product into the market. To do so, companies invested heavily in internal R&D to be more innovative than competitors. Thanks to such investments companies were able to come up with new ideas, and then products, in the new market. Moreover to keep the competitive advantage of the new products, they protected own knowledge by aggressive controlling of their IP to avoid competitor exploiting it. They could invest the profit of the new products in new innovation, creating a virtuous cycle of innovation. In the new open model the approach and the strategy to innovation is shifted. In fact it is not necessary that all steps to innovation are carried out within the organization, instead it suggests that it is better that some of them are localised outside the boundaries of organization
DIFFERENCES BETWEEN THE TWO MODELS OF INNOVATION
Chesbrough identifies eight main differences in the new model compared to the closed model:
"Equal importance given to external knowledge, in comparison to internal know ledge."
"The centrality of the business model in converting R&D in commercial value." Open innovation suggests that inventive output from within the firm not be restricted to the current business model, but instead have the opportunity to go to the market through a variety of channels.
"Type I and Type II measurement errors in evaluating R&D projects."
"The purposive outbound flows of knowledge and technology." Enabling outward flows of technologies that lack a clear path to market internally seek such path externally. So the internal business of the firm now compete with these external channels to market ( such as licensing, ventures, and spin-offs that can create additional value) for new technology.
"The abundant underlying knowledge landscape. " In open innovation, useful knowledge is generally believed to be widely distributed, and of generally high quality.
"The proactive and nuanced role of IP management." IP becomes a critical element of innovation, since IP flows in and out of the firms on a regular basis, and can facilitate the use of markets to exchange valuable knowledge. IP can sometimes even be given away through publication or donation.
"The rise of innovation intermediaries." As innovation becomes a more open process, intermediate market have now arisen in which parties can transact at stages which previously were conducted entirely within the firm.
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"New metric for assessing innovation capability and performance." Classical metrics include the percent of sales spent on (internal) R&D, the number of new products developed in the past year, the percentage of sale from new products. New metrics will expand or perhaps substitute for some of these measures.
WHY OPEN INNOVATION?
For many years the closed model was the only approach to innovation, and the model worked well, but why now do companies think that is not the best way anymore and are they looking for something else?
"The main reasons of the rise of the new model are, firstly, the increasing cost of technology development in many industries. Case in point: the soaring cost of building a semiconductor fabrication facility, or "fab." In 2006, Intel Corp. announced two new fabs, one in Arizona and the other in Israel. Each was estimated to cost more than $3 billion. Just 20 years ago, a new fab would have cost about 1% of that. Another example is pharmaceutical drug development. Investment in a successful product has risen to well over $800 million, up more than ten-fold from just a decade earlier. Even the consumer products indudstry is feeling the pressure. P&G estimates that its Always brand of feminine hygiene pads, which cost $10 million to develop a decade ago, would set the company back anywhere from $20 million to $50 million today, according to Jeff Weedman, who is responsible for external business development at P&G."
The rising costs of technology development would imply that only the big will get bigger, with everyone else falling behind. But there's a second force at play: the shortening life cycles of new products.
"In the computer industry during the early 1980s, for example, hard disk drives would typically ship for four to six years, after which a new and better product became available. By the late 1980s, the expected shipping life had fallen to two to three years. By the 1990s, it was just six to nine months."
Because of that companies are facing difficulties to justify investment in innovation. But the new model can help them, in fact it attacks the cost side of the problem by leveraging external research-and-development resources to save time and money in the innovation process.
"Consider P&G's Pringles Print initiative, through which the company now offers Pringles with pictures and words printed on each chip. To bring that product to market, P&G found and adapted an ink jet technology that a bakery in Bologna, Italy, used to print messages on cakes and cookies. P&G developed Pringles Print at a fraction of the cost and brought it to market in half the time than it would have taken had the company done all the work internally."
Open business models also attack the revenue side: "P&G, for instance, is creating new brands by licensing technologies from other companies around the world, resulting in products like the SpinBrush, a battery-operated toothbrush, which generated first year sales of $200 million. And P&G is also getting money from licensing its technologies to other firms."
THREE OPEN INNOVATION PROCESSESS
The results of a research by Oliver Gassmann identify three core open innovation processes:
The outside-in process: Enriching the company's own knowledge base through the integration of suppliers, customers and external knowledge sourcing can increase a company's innovativeness.
The inside-out process: earning profits by bringing ideas to market, selling IP and multiplying technology by transferring ideas to the outside environment.
The coupled process: coupling the outside-in and inside-out processes by working in alliances with complementary partners in which give and take is crucial for success.
All three the core processes represent an open innovation strategy, but not all are equally important for every company.
DIFFERENTES STRATEGY OF INNOVATION
Based on the use of those processes, according to Chesbrough, companies are focused their activities into one of three primary areas: funding, generating or commercializing innovation.
Funding innovation: There are two different type of organizations: innovation investors and benefactors, and are focused on providing fuel for the innovation fire. Their capital helps move ideas out of corporations and universities and into the market, typically through the creation of start-ups.
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Generating Innovation: There are four types of organizations that primarily generate innovation: innovation explorers, merchants, architects and missionaries. Innovation explorers specialize in performing the discovery research function that previously took place primarily within corporate R&D laboratories. Innovation merchants must also explore, but their activities are focused on a narrow set of technologies that are then codified into intellectual property and aggressively sold to (and brought to market by) others. Innovation architects provide a valuable service in complicated technology worlds. In order to create value for their customers, they develop architectures that partition this complexity, enabling numerous other companies to provide pieces of the system, all while ensuring that those parts fit together in a coherent way. Innovation missionaries consist of people and organizations that create and advance technologies to serve a cause. Unlike the innovation merchants and architects, they do not seek financial profits from their work.
Commercializing Innovation: Lastly, two types of organization are focused on bringing innovations to market: innovation marketers and one-stop centres. Innovation marketers often perform at least some of the functions of the other types of organization, but their defining attribute is their keen ability to profitably market ideas, both their own as well as others'. Innovation one-stop centres provide comprehensive products and services. They take the best ideas (from whatever source) and deliver those offerings to their customers at competitive prices.
KEYS TO IMPLEMENTING "OPEN INNOVATION"
Mike Docherty (CEO of Venture2 Inc.) identifies five main keys driver to implement successfully the open model in an organization:
Know what you want from open innovation. The key is to develop broad, but well-defined paths for innovation around new customer segments, geographies, platforms, technologies, channels or markets. These growth paths provide important guidance to the organization related to in-bounds and out-of-bounds activities.
Know the sources of new ideas for your market. Firstly, the organization needs to leverage non-traditional approaches to identify unmet needs, secondly, to create a network of resources to find enabling technologies and solutions, and in the end to exploit the intersections of needs, technologies and market opportunities.
Know when to make your move. The right time to enter a new market or acquire an emerging technology is when the dominant design is established. A difficult task, but one made easier if instead of developing all of your own technology.
Know Your Execution Roadmap. Companies should approach this scale-up in two phases: "Piloting" innovation via in-market experimentation and then "Extending" innovation via more traditional marketing and distribution strategies.
Know Thyself. To make it work, companies need to built their approach around who are they as a company and as a culture.
Moreover, Docherty identifies four important point to take into account during the implementation:
Broaden the view.
Create alignment across the innovation ecosystem.
Adapt an approach for an organization's tolerance for risk.
Put the focus on learning, not just result.
Finally, Chesbrough focus on the importance to built a business model to handle significant volume, and to take care of the internal resistance that companies can face during the implementation.
It is clear that companies, that fit this new open model, need to rethink their approach to innovation. This is so they can be more effective and efficient in innovation processes, especially in a complex market with increasing costs and shorter life cycles of new products.
The possibilities offered by open innovation, will be the key to the achievement in the future challenges that companies may face.