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A critical examination of open innovation theory and practice.

A critical examination of open innovation theory and practice.

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An essay for the 2011 Undergraduate Awards Competition by Judith Hannaway. Originally submitted for Managing Open Innovation at University of Ulster, with lecturer Brendan Galbraith in the category of Business & Economics
An essay for the 2011 Undergraduate Awards Competition by Judith Hannaway. Originally submitted for Managing Open Innovation at University of Ulster, with lecturer Brendan Galbraith in the category of Business & Economics

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Published by: Undergraduate Awards on Aug 29, 2012
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A critical examination of open innovation theory and practice.
The term Open Innovation was coined by Henry Chesbrough in 2003. Chesbroughdefines this new information paradigm as (2004:23):The Open Innovation paradigm assumes that firms can and should use externalas well as internal ideas, and internal and external paths to market, as theylook to advance their technology. Open Innovation assumes that internal ideascan also be taken to market through external channels, outside a firm's current businesses, to generate additional value.The aim of this paper is as follows: to define Open Innovation (OI), why is itnecessary to adopt the OI model, what are the different types of OI and the associatedmanagerial challenge. It will also discuss the role of OI in practice and whether it hasa future in this global market place.Chesbrough proposes that in order for companies to remain competitive, they shouldrevaluate their business model to allow ideas created within their organisation to beshared or sold to other information users in order for those ideas to progress.Likewise, he believes that organisations should source ideas from as wide a pool of resources as possible. That through sharing information, organisations can gain newknowledge, that they perhaps did not have the facilities to harness on their own.Marketing Week claims (2008:17) “At its heart is a belief that the seeds of innovationare more likely to be found outside businesses than within.”Fowles and Clark (2005:46) surmise that “Many innovative companies relied almostentirely on their in-house scientists and assessed their innovation ability based on thenumber of patents turned out in a year.” Organisations, particularly those in thetechnology industry, are starting to turning away from this traditional model of closedinnovation and are experimenting in open innovation, IBM is prime example of acompany that has moved away from the closed model and released five hundred patents in order to adopt open innovation.One of the biggest reasons for this shift in how companies source their ideas is therising cost of Research and Development (R&D) within traditional closed structure.Chesbrough (2007:24) states that “The rising costs of technology development wouldimply that only the big will get bigger” This would leave no room for emerginginnovations in the market place, if they were not introduced by one of the bigger corporations.A current case study of Intel by Chesbrough (2007:24) shows;The soaring cost of building a semiconductor fabrication facility, or “fab.” In2006, Intel Corp. announced two new fabs, one in Arizona and the other inIsrael. Each was estimated to cost more than $3 billion. Just 20 years ago, anew fab would have cost about 1% of that.With Intel’s partnerships, they are able to divide the cost of building fab’s and sharethe resources with their partners. As widely reported by the media, the globaleconomy is suffering a recession. Organisations cannot afford to take risks in1
investment during this time; however, this is exactly the time that they should openup. If organisations share the cost and risk, like Intel, they can then gain competitiveadvantage by developing new products while rivals are remaining stagnant by onlyfocusing on their cash cows.It is necessary; to ensure that companies remain competitive they bring in newinnovative ideas to gain advantage over rivals. Marketing Week (2008:17) observethat “societies that are open to the world are almost always more innovative and a lotmore interesting than those that keep their borders shut.” Advocates of the OI modelwould believe the same is true of business, that those who open their R&Ddepartments are the ones that flourish and remain ahead of their competitors.Many products now have shorter lifecycles, for example, mobile phones are almostconsidered to be disposable commodities in the western world. The more modern phones are used for fashion and status symbols. With such a high turnover in newmodels, it would be virtually impossible for organisations to carry out the entire R&Dthemselves, it is necessary to form alliances, to share the cost, the risk and the profits.Technology is continually progressing and OI is being used to build upon pastdiscoveries. JVC’s invention of VHS was one of the most disruptive technologicaldiscoveries of the last fifty years; most households in MEDC’s
had one. However,the technology to watch films at home has since progressed, with the invention of theDVD player, (with HD or Blue Ray varieties). Technology has now developed so thatconsumers can record programmes directly onto the hard drive without the need for DVD’s or videos. This type of technological development would only be made possible through the use of OI. Whilst JVC developed the VHS, and Eindhoven-headquartered Royal Philips Electronics (Subramanian, 2006:108) invented the DVD,it is other companies that use the idea developed by JVC and Philips to bring the product to mass market. They add their own features, perhaps not even thought of bythe original inventors, to give them the competitive edge in the marketplace. Thesetechnological advancements would not be possible if ideas could not be developedfurther by scientists other than the original inventor.Bill Joy of Sun Microsystems stated “Not all the smart people in the world work for you”. This is one of the cruxes upon which OI is based. Organisations that only look internally for ideas will become dull and lose their competitiveness. The Fortune 500gives a listing of the top five hundred successful corporations in America, in 1958; thetop ten was dominated by oil, motor or steel companies. In 2008, Wal-Mart stores became number one, whereas it didn’t feature in the top five hundred fifty years ago.Wal-Mart has embraced an OI culture, for example, by introducing bar codes to their  products they were able to streamline their operations, and they liaise withUniversities to gain knowledge;In March 2007, we partnered with the University of Arkansas and Blue CrossBlue Shield of Arkansas, Alabama and Illinois to announce the formation of The Center for Innovation in Health Care Logistics at the University of Arkansas. (www.walmartstores.com accessed 25/03/2009)
More Economically Developed Countries
Wal-Mart has also recently launched a web-based innovation initiative.(www.walmartstores.com accessed 25/03/2009) Wal-Mart stores have reached this pinnacle of excellence through an OI business model.Due to technological advancements such as the internet, the world has become aglobal market place, it is just as easy for a consumer to purchase a product fromHelsinki as it is to buy the same item locally (if not easier, as the consumer can do sofrom the comfort of their own home). Every time a consumer logs on to the internet,they are bombarded with advertisements from all over the world. Friedman, cited byErskine (2009:12) tells us “the world is flat”. This means that companies must step upto this increased competition through globalisation and find a way of reducing costswhilst at the same time improving their products. However, whilst this globalisationundoubtedly poses a threat to companies, if they adopt an OI mindset, they can use itto their advantage; through increased communication they can connect with otherswho have ideas how to improve the product through forums or online focus groups.For example:In November 2008 Henry Chesbrough founded an exclusive, members-onlyclub: The "powerhouse Berkeley Innovation Forum". Major companies likeCoca-Cola, Kraft, Philips Electronics and others joined the club for an annualmembership fee of $10,000. Members are meeting privately twice a year andcommunicate over a private online community. Their official target is to
"share ideas on how to meet research and development challenges acrossindustries" 
. But unofficial it is a direct way for companies to communicatewith a top researcher in Berkely and the leader on the topic of openinnovation. (www.open-innovation.net, accessed 25/03/2009)They can outsource labour and resources on a global scale and find where would bemost cost effective. Whilst it is true that they face increased competition online,companies can advertise their own products online globally in order to try and counter the threat.As has already been alluded to, there are different types of open innovation.Open Source is one of the more popular types of OI as it can have mutual benefits for all those involved. West et al (2006:319) explain open source as “Firms involved inopen-source software often make investments that will be shared with real and potential rivals.” Large corporations will give their part of their product design or code away to other companies to adapt or alter in some way so as it can beincorporated into their product. For instance, Microsoft shares its code for MicrosoftOffice programmes with BlackBerry. Blackberry then adapts the code to make the programme a compatible application for their Smartphone’s. This in turn will make both BlackBerry more desirable to the Microsoft users, and vice versa. Part oBlackBerry’s success is dependant on the number of alliances it has with other firmsin order to adapt their products, such as FaceBook, Guitar Hero and MSN Messenger amongst many others.Another popular type of OI is User Innovation, West et al (2008:223) suggest “theemphasis has been on innovations from downstream (the customer) side of the valuechain”. This means that organisations take on board the consumer’s views andrecommendations on the product in order to improve, as they end user is the person3

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