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Open Innovation

Open innovation is a technique used in business to drive innovation that involves

sourcing ideas, concepts, and solutions from a broad diversity of people and organizations

(Docherty, 2006). In contrast to the corporate silo mentality and the secrecy typically associated

with the corporate R&D culture, open innovation challenges represent a true cultural shift. When

a corporation recognizes that there are many bright people and more expertise outside the

organization, an innovation model becomes viable. Currently, there is a greater chance than ever

to draw in those outside people and businesses.

Companies use a variety of strategies to execute open innovation methods, including

corporate alliances, university research chairs, crowdsourcing competitions, and innovation

ecosystems.

Chesbrough’s Principles of Open Innovation

According to Tidd & Bessant (2016), the following are three of Chesbrough’s six

principles of open innovation:

External ideas can help create value, but it takes internal R&D to claim a portion of

that Value chain for you.

The performance of businesses in terms of innovation is positively impacted by both

internal R&D activities and external knowledge sourcing. Strong internal R&D capacities

increase the impact of sourcing from value chain partners and horizontal links. This suggests that

understanding the role of open innovation in emerging economies requires a combination of

various external knowledge partners and internal R&D capabilities (Cheng, Vanhaverbeke, &

Du, 2016).
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For example, Procter & Gamble launched a new line of Pringles potato crisps in 2004

with pictures and words—trivia questions, animal facts, jokes—printed on each crisp. They were

an immediate hit. By applying a fundamentally new approach to innovation, they were able to

accelerate Pringles Prints from concept to launch in less than a year and at a fraction of what it

would have otherwise cost. Someone suggested that we print pop culture images on Pringles, and

one of their researchers thought they should try ink-jetting pictures onto the potato dough. It was

a great idea, but no one knew how to do it. Traditionally, they would have spent the bulk of their

investment just on developing a workable process.

Instead, they created a technology brief that defined the problems we needed to solve,

and they circulated it throughout our global networks of individuals and institutions to discover if

anyone in the world had a ready-made solution. It was through their European network that they

discovered a small bakery in Bologna, Italy, run by a university professor who also manufactured

baking equipment. He had invented an ink-jet method for printing edible images on cakes and

cookies that they rapidly adapted to solve their problem. This innovation has helped the North

America Pringles business achieve double-digit growth over the past two years.

This is an example of how internal R&D made it possible for Procter and Gamble to

claim a portion of this value.

It is better to build a better business model than to get to the market first.

According to Kopp (2022), a company's business model outlines how it intends to

operate, create and market its brand, manufacture and distribute its goods, and expand or draw in

a market (compete). Choosing a suitable business model is essential to a company's success. New

technology is transformed into economic value through business models. Some start-ups may not

always be able to use well-known business models; hence a new model needs to be developed. In
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most cases, the innovation of the product or service itself is significantly less important than the

relevance of the business model.

For example, while other PC makers focused on computers for the home market, Dell

consciously chose to go after large corporate accounts, which were far more profitable. Other PC

makers offered low-end machines to lure in first-time buyers. Michael Dell was not interested in

this “no-margin” business. He staked out his territory selling more powerful, higher-margin

computers.

Then, because Dell sold direct and could analyze its customers in-depth, it began to

notice that its average selling price to consumers was increasing while the industry was falling.

Consumers who were buying their second or third machines and looking for more power and less

hand-holding were coming to Dell even though it was not targeting them. After it had a

profitable, billion-dollar consumer business, Dell dedicated a group to serving the consumer

segment.

With a decade-long lead, Dell is by far the industry’s best executor of the direct-selling

model. It is a low-cost producer. So it uses its cost advantage in PCs to compete on price, gain

share, and drive the weaker players out of business. At the same time, the company is relying on

its core business model to pursue opportunities in new product markets, like servers, that have

greater profit potential than PCs. The underlying business model remains the same.

If you make the best use of internal and external ideas, you will win.

Open innovation has been shown to favorably impact a company's innovative output by

offering three important advantages: information sharing, risk reduction, and rapid development.

Each partner may be able to learn more from the project through collaboration than they might

have through an independent investment of a similar size (Chesbrough, 2012).

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Utilizing both internal and external ideas yields success since it is one method of

lowering product development costs and lowering the likelihood of failure. Additionally, the

collaboration enables businesses to respond quickly to market demands through accelerated

development and improved customer responsiveness (Lassen & Laugen, 2017).

Samsung and Apple would be two examples of this. Samsung, a competitor in Texas,

develops the CPU that drives Apple's iPad 2 and iPhone 4S. It is called the A5 chip. Businesses

need to ensure that they are quickly and effectively utilizing internal and external knowledge

while also innovating to produce new goods or services. Furthermore, we can see from the Apple

and Samsung examples above that using both will benefit a business and reduce operating

expenses.

Conclusion

Open innovation is essential for businesses because it allows them to use both internal

and external ideas and paths to market as they look to advance their technology while pursuing

lower costs for innovation, quicker times to market, and the opportunity to share risks with

others. As ideas and technologies become obsolete at a very fast rate and much useful knowledge

has been widely disseminated, open innovation is essential for businesses (Chesbrough, 2006).

Organizations need to embrace an "open innovation" business model if they want to succeed in

this new era.

References

Chen, Y., Vanhaverbeke, W., & Du, J. (2016). The interaction between internal R & D and

different types of external knowledge sourcing: an empirical study of Chinese innovative

firms. R&D Management, 46(S3), 1006-1023.

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Chesbrough, H. (2012). Open innovation: Where we have been and where we are

going. Research-Technology Management, 55(4), 20–27.

Kopp, C. M. (2022. August 1). What is a business model with types and examples? Investopedia.

https://www.investopedia.com/terms/b/businessmodel.asp

Docherty, M. (2006). Primer on open innovation: Principles and practice. Pdma Visions, 30(2),

13–17.

Lassen, A. H., & Laugen, B. T. (2017). Open innovation: on the influence of internal and

external collaboration on degree of newness. Business Process Management Journal.

Mowery, D. C. (1983). Innovation, market structure, and government policy in the American

semiconductor electronics industry: A survey. Research Policy, 12(4), 183–197.

Tidd, J., & Bessant, J. R. (2016). Managing innovation: integrating technological, market and

organizational change. John Wiley & Sons.