Research-Technology Management

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The Future of Open Innovation

Henry Chesbrough

To cite this article: Henry Chesbrough (2017) The Future of Open Innovation, Research-
Technology Management, 60:1, 35-38, DOI: 10.1080/08956308.2017.1255054

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The Future of Open Innovation
The future of open innovation is more extensive, more collaborative, and more engaged with a wider
variety of participants.
Henry Chesbrough
Open innovation emerged as a concept about 14 years ago.
At its inception, the focus was primarily upon individual
companies collaborating with partners in interesting ways.
There was the example of Procter & Gamble (P&G) printing
text on Pringles chips using an Italian bakery’s edible ink and
process, or bringing the Swiffer Duster to market via a licens-
ing arrangement with a Japanese company that already had
the product in the market in Japan. In the B2B world, IBM
was capitalizing on both Linux and Java, using them to
advance its IBM Global Services activities. Today, the con-
cept has progressed to include business model innovation
and services innovation, in contexts that include multiple
collaborations, communities, and entire ecosystems.
Fourteen years ago, a Google search on the term “open
innovation” would not have yielded any useful responses.
Today, that search returns hundreds of millions of responses.
In just a decade and a half, open innovation has gone from
nowhere to everywhere. It represents a new conceptual
framework for understanding industrial innovation.
Open innovation works. Since the appearance of my
book Open Innovation in 2003, substantial evidence has
accumulated showing that open innovation can improve
business performance. Individual companies have proudly
proclaimed their success with their versions of open
innovation, such as P&G’s Connect and Develop (Huston
and Sakkab 2006). General Mills analyzed 60 new
product introductions in a 12-month period and found that
those projects that had a substantial open innovation
component outsold the ones that did not by more than
100 percent.1 In the industrial sector, a recent study of
1
Personal conversation between Mike Helser, Director, GTECH Disruptive
Technology, General Mills, and Henry Chesbrough, October 15, 2014.
Henry Chesbrough is an adjunct professor at the Haas School of Business
at the University of California, Berkeley, and a visiting professor of informa-
tion systems at Esade Business School. He previously taught at Harvard
Business School. He has degrees from Yale, Stanford, and Berkeley. He also
worked for several years at Quantum Corporation in the hard-disk drive
business, prior to his PhD from Berkeley. He is the author of Open
Innovation (2003) and five other books on innovation management; he first
attended an IRI meeting back in 1998. chesbrou@berkeley.edu
DOI: 10.1080/08956308.2017.1255054
Copyright © 2017, Industrial Research Institute.
Published by Taylor & Francis. All rights reserved.
INVITED ARTICLE
489 projects inside a large European manufacturer
found that projects involving significant open innovation
collaboration achieved a better financial return for the
company than projects that did not (Du, Leten, and
Vanhaverbeke 2014). A number of quantitative studies
also substantiate the power of open innovation to improve
business performance. Several researchers drawing on data
from the Community Innovation Survey have found that
organizations with more external sources of knowledge
achieve better innovation performance than those with
fewer sources, controlling for other factors (see, for
example, Laursen and Salter 2006). And two recent surveys
of large firms also found that firms that employed
open innovation were getting better innovation results
(Brunswicker and Chesbrough 2014, 2015).
Defining Open Innovation
Just as Eskimos have dozens of words for snow, so, too,
have innovators attributed multiple meanings to the term
“open innovation.” The open innovation paradigm as I’ve
defined it is best understood as the antithesis of the
traditional vertical integration model in which internal
innovation activities lead to internally developed products
and services that are distributed by the firm. In a sentence,
open innovation is a distributed innovation process that
relies on purposively managed knowledge flows across
organizational boundaries, using pecuniary and nonpecuni-
ary mechanisms in line with the organization’s business
model to guide and motivate knowledge sharing (see
Chesbrough and Bogers 2015, p. 3). This is an admittedly
academic definition. It basically means that innovation is
generated by accessing, harnessing, and absorbing flows
of knowledge across the firm’s boundaries.
There are two important kinds of knowledge flows that
underpin open innovation: outside-in and inside-out.
The outside-in part involves opening up a company’s
innovation processes to external knowledge inputs. It is this
aspect of open innovation that has received the greatest
attention, both in academic research and in industry practice.
Many scholars and industry people think that is all open
innovation is about. But that’s wrong. There is a second
branch of knowledge flows that is an important part of the
Research-Technology Management . January—February 2017 j 35

Henry Chesbrough
model: the inside-out flow of knowledge. In inside-out open
innovation, the organization allows unused and under-
utilized knowledge to go outside the organization for others
to use in their businesses and business models. This part of
the model is less studied and hence less well understood,
both in academic research and in industry practice.
Notice what open innovation, whether outside-in or
inside-out, is not: It is not (only) crowdsourcing, where
someone looking for a breakthrough solution submits a
problem to be solved by a group. It is not (only) about
managing suppliers better. And it is not (only) about open
sourcing and the open-source methods inspired by software
communities. This last one is a very common misconcep-
tion. But the open-source approach ignores the business
model and takes no account of the inside-out part of the
open innovation model.
The open-source world also treats intellectual property
(IP) as a barrier to innovation, ideally one that should be
eliminated (see, for instance, von Hippel 2005).2 Indeed,
in the closed innovation model, intellectual property was
conceptualized primarily as a barrier: companies accumu-
lated intellectual property to provide design freedom to
their product developers. In open innovation, by contrast,
intellectual property becomes not a barrier or a bulwark
but rather a new class of assets that can deliver additional
revenues and also point the way toward new businesses
and new business models. The very definition of open
innovation implies that a company practicing open
innovation should be actively trading intellectual property,
both selling (whenever its intellectual property does not
2 into a company’s innovation pipeline, and the company
Jim Euchner (2010) usefully distinguishes open innovation from what
he calls “open source innovation,” with the latter corresponding to von
Hippel’s treatment of the concept.
36 j Research-Technology Management
fit its own business model) and buying (when external
intellectual property does fit with its own business model).
Open innovation as I, and many other subsequent
researchers, have defined it explains a number of critical
phenomena that the closed model of innovation could
not. For instance, one persistent paradox—described in
my Open Innovation (2003)—was the surprising ability of
Cisco to keep up with Lucent’s Bell Labs. Lucent devoted
enormous resources to fundamental research, exploring
new materials and components to fuel future generations
of products and services. Cisco, by contrast, did almost no
original research, preferring instead to invest in or partner
with agile startups, eventually even acquiring some. “In
this way,” I wrote, “Cisco kept up with the R&D output
of perhaps the finest industrial research organization in
the world, without doing much internal research of its
own” (Chesbrough 2003, p. xviii). Anomalies like this,
which could not be explained by the then-dominant model
of innovation, were what led me to the concept of open
innovation.
In exploring these anomalies, I spent a significant
amount of time at Xerox and its Palo Alto Research Center
(now PARC). Some of my research there tracked 35
projects that started in Xerox’s labs and reached a certain
level of development, but then were sold off or spun off
after internal funding was stopped for one reason or
another. Most of those projects subsequently failed, as
Xerox’s managers expected. Since they didn’t see the value
of continuing the project, they assumed that there wasn’t
much value to be realized. But I found a fascinating
anomaly: a few of the projects succeeded brilliantly and
actually became publicly traded companies. The combined
market value of those spinoff entities more than exceeded
Xerox’s own market value. I can assure you that no one
inside Xerox ever expected that! It is also a result the
prevailing business and strategy models would have a very
hard time explaining.
The Challenges of Open Innovation
For all its promise for creating new revenue streams and
strengthening a company’s innovation performance, open
innovation is not without its challenges and limitations.
Indeed, managers are increasingly aware of those
challenges: in two recent, large-sample surveys, nearly 80
percent of the large companies surveyed reported practicing
at least some elements of open innovation, but most of
those companies also reported they were not satisfied
with their measures for managing open innovation
(Brunswicker and Chesbrough 2014, 2015).
Open innovation efforts face a number of important
challenges, two of which I’ll discuss here: managing its
impact on internal innovation processes and transferring
results to the business unit. Outside-in open innovation
brings new ideas into the pipeline; that is one of its
strengths. But if an outside-in effort brings many new ideas
has not invested in downstream capacity to process these
ideas, the influx can create bottlenecks that slow the overall
The Future of Open Innovation
innovation process. And Not Invented Here syndrome,
which is prevalent in many strong technical organizations,
further complicates the acceptance of external knowledge
inputs by the organization.
At the other end of the process, the outcomes of an open
innovation effort must be transferred to the business unit
to be brought to market. It is striking how few open
innovation success stories even discuss the transfer of the
result into a downstream business unit. I expect sig-
nificantly more attention to be paid to the question of
how to link the front end of open innovation to the back-
end businesses that must take these inputs to market.
New Developments in Open Innovation
As I have worked to understand open innovation and
explore its many implications for organizations, a number
of related concepts have emerged as central to its theory
and practice. One is the role of the business model in
commercializing technology, and another is the growing
importance of services in advanced economies around
the world and the application of open innovation to these
services contexts.
Developing Business Model Innovation
An organization’s business model helps to determine which
inflows of knowledge can help fuel innovation, and
which knowledge should be released to other organiza-
tions. However, the business model need not be fixed; it,
too, can be innovated, to create value from different kinds
of knowledge inflows and outflows. My 2006 book, Open
Business Models, was among the first to examine ways to
innovate the business model; since then, business model
innovation has become a growing area of interest for
researchers and practitioners alike. However, most organi-
zations still treat R&D quite separately from the design of
business models. This is a mistake; linking technological
innovation and business model innovation can amplify
the value of each.
A more recent development has made an important
contribution to the ability of organizations to innovate their
business models. The Lean Startup movement, initiated
by Eric Ries and advanced by Steve Blank, and from a
design perspective, the Business Model Canvas by Alex
Osterwalder, have provided widely accepted processes and
tools to explore and test potential new business models.
These frameworks represent a real contribution for organi-
zations trying to get more value out of open innovation,
because they provide practical approaches to mapping excit-
ing new business models for internal projects that don’t fit
with the organization’s main business model—and thus
point the way to harvesting value from inside-out knowl-
edge flows. Imagine what might have happened if Xerox
PARC had a lean startup capability for its spinoff projects!
Shifting into Services
Another recent development in open innovation is innovation
in services. Most of the top 40 economies in the OECD get
The Future of Open Innovation
An organization’s business model
helps to determine which inflows of
knowledge can help fuel innovation,
and which knowledge should be
released to other organizations.
half or more of their GDP from services. And many
companies are witnessing a shift to services as well; Xerox
now gets more than 25 percent of its revenues from services.
IBM is another classic case, as are GE and Honeywell.
In some cases what’s really happening is the business
model is shifting; a product business is becoming a service
business. For example, a GE aircraft engine can be sold
for tens of millions of dollars. That same engine can also
be leased through a “power by the hour” program. In the
first case, it’s a one-time product transaction. In the second
case, the engine becomes a service, generating ongoing
revenue through its 30-year operating life.
More generally, innovation in services must negotiate a
tension between standardization and customization. Stand-
ardization allows activities to be repeated many times with
great efficiency, spreading fixed costs over many transac-
tions or customers. Customization allows each customer
to get what he or she wants, leading to high individual
satisfaction. Standardization denies customers much of
what they want, while customization inhibits efficiency.
Service platforms offer a resolution for this dilemma
(Chesbrough 2011). Platforms invite others to build on
top of the original offering, allowing the economies of
standardization in the platform to coexist with customiza-
tion in the applications built on top of it. A good example
of this is found in Apple’s App Store or GooglePlay for
Android. Apple and Google provide the foundation for your
smartphone, while allowing each of us to install the specific
apps we want for certain functions.
This kind of platform leadership represents for me the
business model side of systems integration. To get others to
join your platform, you need to construct a business model
that inspires and motivates customers, developers, and
others. The platform must allow potential contributors to
create business models that work for them, even while your
business model works for you. When a platform is designed
well, the activities of contributors increase the value of your
business—their money makes your business more valuable.
Open Innovation 2.0
Open Innovation (Chesbrough 2003) presented a series
of case studies that examined collaborations between
two organizations. Today, though, we see the concept being
used to orchestrate a large number of players across
multiple phases of the innovation process. Designing and
January—February 2017 j 37
managing these kinds of innovation communities is going
to become increasingly important to the future of open
innovation, and innovation in general. This is true both
for firms and for the larger society in which these firms
operate. Inside the European Commission, this concept is
known as Open Innovation 2.0 (European Commission
2016).
Two distinct examples illustrate how community-level
open innovation can be managed across a broad spectrum
of innovation activities.
. The Taiwan Semiconductor Manufacturing Corporation
(TSMC) provides manufacturing services; its clients
design semiconductor chips that TSMC then fabricates.
Designing chips is a complex process that requires a
variety of design tools, such as reference designs and
process recipes. As TSMC became an important
player in the semiconductor design and manufacturing
ecosystem, many of the third-party companies who
make these tools began to ensure their offerings would
run on TSMC’s processes. This expansion in third-party
tool offerings creates more design options for TSMC’s
customers—a clear benefit—but these offerings also
increase the complexity customers must manage, increas-
ing the risk of expensive chip redesigns or modifications—
a clear risk. TSMC has addressed this risk with its
Open Innovation Platform (their term, not mine!), which
combines the company’s design and manufacturing
services with those provided by third-party companies
and then tests them all together. The tests certify to
customers that their designs will function correctly.
This service avoids very expensive “turns” of the chip
design, in which the chip must be redesigned in order
to be manufactured properly at volume. The result is
faster time to market for TSMC’s customers at a lower
design cost.
. GE’s recent Ecomagination challenge illustrates another
way of creating, and leveraging, an open innovation
community. In the early 2000s, the company took note
of a great deal of venture capital and startup activity in
green and renewable energy technologies. Rather than
developing its own presence in this business from scratch,
GE enlisted four active venture capital firms that already
had experience in this space. Together, the venture capi-
talists and GE pledged a total of $200 million to invest in
attractive startup ventures in green and renewable
energy, and the Ecomagination challenge was born.
When the challenge was launched in July 2010, in the
form of an open invitation to submit potential project
ideas, more than 3,800 proposals were received; 23 were
funded, and another 5 received other awards. GE has
adapted the model to health care (the Healthymagination
challenge launched in 2011), launched a similar chal-
lenge in China, and is developing new ones in the
Internet of Things space.
And one need not be a large company to open the
innovation process up to the community. A small firm in
38 j Research-Technology Management
Florida, Ocean Optics, instituted a community innovation
challenge on a much smaller scale, to explore new ideas
in optical sensing.3
Conclusion
This is the future of open innovation—a future that will be
more extensive, more collaborative, and more engaged
with a wider variety of participants. It will extend beyond
technology to business models, and it will embrace both
product and services innovation. Just as no man is an
island, no firm that restricts itself to the confines of its
own R&D lab will be successful in an open innovation
world. As one R&D manager observed to me, “Before open
innovation, the lab was our world. With open innovation,
the world has now become our lab.”
References
Brunswicker, S., and Chesbrough, H. 2014. A fad or a
phenomenon? The adoption of open innovation
practices in large firms. Research-Technology Management
57(2):16–25.
Brunswicker, S., and Chesbrough, H. 2015. Open Innovation
Executive Survey. Center for Digital Open Innovation,
Purdue University.
Chesbrough, H. 2003. Open Innovation: The New Imperative for
Creating and Profiting from Technology. Boston, MA: HBR
Press.
Chesbrough H. 2006. Open Business Models: How to Thrive in the
New Innovation Landscape, Boston, MA: HBR Press.
Chesbrough, H. 2011. Open Services Innovation: Rethinking Your
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Bass.
Chesbrough, H., and Bogers, M. 2015. Explicating open innov-
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Chesbrough, Wim Vanhaverbeke, and Joel West, pp. 3–28.
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3
The team that ran the Blue Ocean proposals can now be found at
http://www.open-photonics.com/.
The Future of Open Innovation