Open Innovation

Up until recently many organisations developed new technologies for their products internally i.e. they undertook relatively closed innovation strategies (Lichtenthaler, 2011, p75). However the disadvantages to this were that organisations had little interaction with the outside environment, thus their innovations were limited to their own knowledge. There were only a few exceptions to this, mainly within the chemical industry where active technology transactions were encouraged. Despite this in recent years these strategies have begun to change as firms across industries have increasingly acquired external technologies to complement their internal knowledge bases (Lichtenthaler, 2011, p75). This was done by means of strategic alliances or in-licensing, which involves acquiring the right to use external knowledge (Lichtenthaler, 2011, p75).

In 2003 Henry Chesbrough coined the term ‘open innovation’ to describe the innovation process of firms interacting with their environment, resulting in external knowledge exploration and exploitation (Lichtenthaler, 2011, p76). The official definition of 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 (Chesbrough et al, 2006, p1).

A good case study for exploration of open innovation is Fiat. Who discovered that n the midst of a worse than expected economic downturn, had reached the status of worldwide excellence (Minin et al, 2010, p132). This was because of open innovation. In 2009 Chrysler were in threat of going bust due to the current economic climate. However Fiat agreed to create a partnership with Chrysler in order to revive it. Fiat demonstrates that it can build the clean, fuel-efficient cars that are the future of the industry and as part of this partnership with Chrysler, Fiat then agreed to transfer billions of dollars in cutting-edge technologies to Chrysler to help them do the same (Minin et al, 2010, p132). This is an example of open innovation as Chrysler is using the knowledge of others, i.e. Fiat in order to innovate their products.

Open innovation seems to be extremely beneficial to some companies. However are there any disadvantages to this new innovation process? The results of a recent Bain & Company survey of more than 200 global senior executives suggest there is a desire to pursue open innovation (Rigby and Zook, 2002, p82). It was stated that one of many reasons for this was the fact that nearly two-thirds of company executives admitted their businesses were not close to realizing their full potential, and reaching this potential was critical to creating future competitive advantage and earning profits (Rigby and Zook, 2002, p82). Therefore there was a huge need for the like of open innovation. This case study also showed that some of the fastest growing and most profitable industries found open-market innovation to be a critical new source of competitive advantage (Rigby and Zook, 2002, p82). Some of the advantages therefore of open innovation are that the importation of new ideas is a good way to increase the success of a company’s innovations. This is because when outside sources are used for innovation ideas, internal innovators have more ideas to choose from and different kinds of expertise available to them, therefore the cost, quality and speed of innovations improve (Rigby and Zook, 2002, p82). As a result of this companies that use open innovation within their R&D departments gain a higher percentage of total sales from new products than those who don’t (global think tank the STEP Group: CITED: Rigby and Zook, 2002).

Another Advantage of open innovation is exportation of ideas. This is a good way to raise cash and keep talent. This also gives companies a way to measure an innovation's real value and to determine whether further investment is warranted helping companies clarify what they do best. This is done by managers looking at their innovation initiatives through ‘market hardened eyes’ that regularly reveal where the business is going and where it has advantages over its rivals (Rigby and Zook, 2002, p84).

However despite the advantages of open innovation, there are also some disadvantages. An example of this is the ‘not invented here syndrome’ (Rigby and Zook, 2002, p82) where companies are reluctant to use an innovation due to the idea coming from an external source, this may be to do with internal pride. Another risk to consider when contemplating open innovation is that of competition. Sceptics of the open innovation approach like to cite valid examples of companies that miss out because they shared their innovations with current or potential competitors, who create or produce the innovation faster or better than they could (Rigby and Zook, 2002, p84). The dangers of sharing innovations are real, but they are manageable. Generally, the greatest danger lies not in the transfer of the innovation but in the structure of the deal. Furthermore, selling or renting innovations poses fewer competitive risks than simply giving them away.

I think that open innovation is a good idea as it allows companies to come up with new and better innovations together, as opposed to creating ok innovation alone.   

References

Chesbrough, H., Vanhaverbeke, W. West, J. (2006) Open innovation: Researching a new paradigm. Oxford, UK: Oxford University Press.

Di Minin, A. Frattini, F. Piccaluga, A. (2010) Fiat: Open Innovation in a Downturn (1993-2003). California Management Review. Vol. 52 Issue 3, p132-159.

Lichtenthaler, U. (2011) Open Innovation: Past Research, Current Debates, and Future Directions. Academy of Management Perspectives. Vol. 25 Issue 1, p75-93.

Rigby, D. Zook, C. (2002) Open-Market Innovation. Harvard Business Review. Vol. 80 Issue 10, p80-89.