Applying open Innovation

Applying open innovation where yourcompany needs it most

Amy Muller, Nate Hutchins and Miguel Cardoso Pinto

The concept of open innovation, as first proposed by Henry Chesbrough in 2003,

suggested that companies would benefit by making ‘‘greater use of external ideas

and technologies in their own business, while letting their unused ideas be used by

other companies.’’ It was widely hailed as a powerful antidote to the ‘‘not-invented-here’’

syndrome that stifled innovation in many mature companies.[1] In theory, new ventures that

would otherwise sit on a shelf and collect dust would flourish amidst open business models

that reach beyond corporate boundaries to garner and commercialize valuable ideas,

technologies, insights, capabilities, and assets from consumers, experts, external partners,

and even competitors.

A decade later, though a number of pioneering companies successfully employed open

innovation business models, companies planning to jump on the bandwagon face some

daunting choices! Open innovation now includes customer input, crowd-sourcing,

open-source projects, patent acquisitions, soliciting external insights, supplier integration,

venture investing, and joint-development projects. The myriad options for engaging external

partners can be daunting, so leaders need a guide for getting started with open innovation

that matches the needs of their firm.

As a first step, we recommend looking at the output of your company’s innovation process at

each stage of development to consider which open innovation methods will best serve your

company’s growth objectives. Additionally, we suggest how companies should approach

new relationships with external partners to gain access to the expertise they seek, while also

protecting the company’s interests.

Assess your company’s innovation process

The process of innovation can be best understood as the identification of an opportunity and

the creation of its accompanying business model. As the opportunity progresses through

development, five key questions about the business model will be defined:

B Who is the target customer and what unarticulated needs do they possess related to our

business?

B What is the offering (product or service) and the underlying value proposition?

B How will the venture create sustainable competitive advantage?

B How must the value chain be configured to deliver the offering, and where will we play?

B How will the venture generate economic value for our company and key stakeholders?

Innovation processes are typically broken down into three stages during which the business

model elements are conceived and elaborated: idea-generation, idea-development, and

commercialization:

DOI 10.1108/10878571211209332 VOL. 40 NO. 2 2012, pp. 35-42, Q Emerald Group Publishing Limited, ISSN 1087-8572 j STRATEGY & LEADERSHIP j PAGE 35

Amy Muller and Miguel

Cardoso Pinto are Directors

and Nate Hutchins is a

Principal with Strategos, a

global strategy and

innovation consulting firm

(www.strategos.com), the

Strategic Services division

of Innovaro.

1. Idea-generation refers to the process of gathering insights about consumers and their

needs, and then generating or identifying potential ideas – new products, services, or

technologies – that address these insights.

2. Idea-development transforms the most promising of these ideas into market-ready

business opportunities by refining the five key business model elements.

3. Commercialization is the process of testing early hypotheses about the opportunity,

adjusting the business model based upon new insights, and scaling the opportunity for

launch.

The question for leaders is: In which of the three stages do your new ventures typically stall?

The goal is not to study each process, but rather to qualitatively evaluate the output at each

stage of development. Much as a savvy process engineer can pinpoint deficiencies in a

production line caused by excessive re-work and inventory, leaders can spot problem areas

in their innovation processes by noting where in development new opportunities typically

begin to unravel. Do incremental ideas support the value proposition? Are promising

innovations quickly elaborated in a disciplined way? Does your company invest significant

resources in developing a new idea, only to watch it fizzle when it hits the market?

Understanding where failure repeatedly occurs as new ventures progress through

development is the first step to identifying how open innovation can best support new

growth initiatives.

1. Idea-generation: sourcing insights and ideas

The goal of idea-generation is to assemble a rich portfolio of high quality ideas, both

incremental and radical. Considering the rate of attrition as ideas move through typical

development processes, this will require generating a large number of ideas from diverse

sources that span the entire business model. Furthermore, ideas are the ‘‘seed corn’’ from

which new ventures will be cultivated – in order to take root, they must connect with

customer needs, and also generate excitement among employees. If a company produces

only a limited quantity of new ideas, or only lackluster ideas that are predominantly

incremental in nature, the shortfall can be rectified by applying open innovation in two

distinct ways.

Gathering insights from external partners. First, look outside for new insights. Quality ideas

arise from quality insights: about your customers, your markets, your competencies and

assets, and even your own corporate orthodoxies. A wealth of compelling insights can be

gained by tapping the knowledge of external partners. One easy first step is to recruit a

variety of people from outside your company, industry, and expertise to participate in

‘‘insight sessions’’ to collect and synthesize observations about your markets, products, and

customers. Focus these sessions on an area that is of importance to your business, but allow

some free-ranging discussion. Include external people who bring depth of perspective to

the issue at hand: academics, technical experts, lead users, futurists, ethnographers,

extreme users, and others. As an alternative method, some companies can send their own

people into the field to capture customer insights. For example, Dow Corning has developed

a ground-breaking program, Citizen Service Corps, in which employee volunteers perform

service projects in emerging markets, while simultaneously gathering insights into

consumers’ needs and exploring new opportunities for innovation that would use the

company’s advanced silicone technologies. ‘‘Our team’s field experience working on

standards for affordable housing has led to deeper understanding of the needs,’’ explains

Chip Reeves, Director of Discovery at Dow Corning. ‘‘Communities and the non-profit

organizations serving them benefit from our team’s contributions, while our employees return

with enhanced leadership skills and first-hand insights into low-cost housing challenges in

emerging markets.’’

Scouting for ideas. Involving many diverse minds and voices in the ideation process is

crucial to ensuring a rich breadth of new ideas. Groups of individuals with similar values,

backgrounds, and perspectives will tend to produce similar ideas. Reaching beyond the

boundaries of the organization will yield a more diverse set of ideas, unencumbered by the

PAGE 36 jSTRATEGY & LEADERSHIPj VOL. 40 NO. 2 2012

company orthodoxies. A number of external sources are available to collect new ideas,

including academia, consumer groups, and the community at large. For example,

‘‘scouting’’ is an approach commonly employed to stay informed about the latest new ideas

and technologies. Siemen’s Technology to Business Center in Berkeley, California cultivates

relationships with scientists, venture capitalists, and entrepreneurs to learn about emerging

technologies.[2]

Starting a dialog with customers about their needs and suggestions via online forums is an

increasingly popular source of new ideas. A successful example occurred when Fiat

Automobiles launched a website to solicit ideas for the new car of the future. Users were

asked to think about broad issues such as traffic and life inside the car. More than 17,000

participants around the world submitted more than 11,000 ideas, and Fiat launched the Mio,

the world’s first crowd-sourced car, in 2010.[3] Other companies have found online

communities of inventors, designers, developers, and leading-edge users to be fertile

ground for new ideas. In 2007, Cisco launched an external innovation competition called the

I-Prize to help the company identify promising business platforms for future growth. More

than 2,500 innovators from 104 countries submitted 1,200 distinct ideas. The winning idea, a

sensor-enabled smart-electricity grid, was awarded a lucrative prize of $250,000.[4]

Finally, ideas can also be sourced via ‘‘idea scouts’’. Consultants at The Big Idea Group tap

its inventor and problem-solving network to find ideas addressing a particular theme, as

specified by the client. Specialist firms like Chaordix and Edison Nation serve as

crowd-sourcing facilitators, connecting at-large consumers looking to profit from their ideas

with companies possessing the means to bring them to market.

2. Looking outside for idea-development

Though it can be hard to come up with a blockbuster idea, especially one based on

compelling market insights, it’s even harder to navigate the long and often arduous process

of building a raw idea into a fully fleshed out business concept ready for market testing.

During idea-development, the key elements of the business model are elaborated – in

particular, the value proposition to the customer, how the offering is differentiated from the

competition, and how the venture will make money. Furthermore, the offering itself must be

molded and shaped from its original, nascent state into a commercially viable product or

service. Given competing priorities for time and resources within most organizations, it is not

uncommon for companies to abandon a new idea upon encountering its first major

roadblock. Alternatively, some ideas progress into complete business concepts, but fail to

achieve a level of differentiation sufficient to achieve sustainable competitive advantage in

the marketplace. Open innovation can be used to bolster new ideas and their associated

business models, and ready them for the true test of market acceptance during

commercialization.

Transactional development. The type of external relationship employed during

idea-development will vary depending on the extent of development needed for the

concept and its associated business model. Transactional solutions such as working

through an idea broker or acquiring a patent may be sufficient if the idea is only missing a

specific technical solution. For example, InnoCentive, a company that brokers open

innovation, posts ‘‘challenges’’ by member companies for solution by its worldwide network

of solvers. Winners of the challenges receive from $5,000 to $1 million depending on the

complexity of the problem. A more intensive approach is to employ external developer

‘‘ The myriad options for engaging external partners can bedaunting, so leaders need a guide for getting started withopen innovation that matches the needs of their firm. ’’

VOL. 40 NO. 2 2012 jSTRATEGY & LEADERSHIPj PAGE 37

communities to support ongoing development. Software developer Salesforce.com relies on

an incubator with co-located external resources to accelerate the development of

applications that support its core technology platform. Developers work in a Salesforce.com

location and have access to the company’s technical and market guidance. In this way,

Salesforce.com can monitor and guide idea-development supported by external

developers.[5]

Venture-based development. Venture investing may be the most expeditious means to

support idea-development in industries that involve a high degree of research and

development that is widely distributed across universities and research centers. In the

technology sector, in-house venture funds that seek out and support promising external

innovations offer a way to leverage outside resources for idea-development, providing the

resources that motivate entrepreneurs to turn their raw ideas into market-ready

opportunities. Intel has successfully used this model since 1991 to incubate innovations

that support its strategic objectives.[6] Outside venture-capital firms can also be considered

an external source of capital for market-ready innovations.

Outsiders as intermediaries. There are intermediaries that can provide companies with

market-ready ideas as well as raw ideas. Professors Satish Nambisan and Mohanbir

Sawhney have termed these intermediaries ‘‘innovation capitalists.’’[7] The intermediaries,

such as Evergreen Innovation Partners and Ignite IP, will use their own network of inventors

or other external sources to search for ideas at a client’s request. In some deals, these

innovation capitalists acquire partial ownership of the idea and then develop it to the point

where its market potential can be validated.

Acquisitions. If competitive pressures require a quick response, acquiring a market-ready

idea in the form of a small company may be the preferred route. For example, Proctor

& Gamble paid $475 million for the small company that invented the SpinBrush electric tooth

brush, which became a critical and successful component of P&G’s oral-care business.[8]

High-tech companies commonly use such an approach to bolster their in-house innovation

efforts. As examples, Google acquired Android to bolster its innovation in wireless and

Microsoft acquired Skype to accelerate its innovation in communications.

3. Commercialization: leveraging partners for launch

During commercialization, major assumptions about the opportunity are tested, and the

business model is adjusted as needed before scaling up to a full product launch. At this

stage, faulty assumptions from earlier in development tend to surface, causing delays and

adding to the cost. Worse, some promising innovations get cancelled because of

deficiencies discovered in this last stage. At IBM, the old joke was ‘‘products don’t get

launched, they escape,’’[9] referring to the internal bureaucratic barriers in the path of

getting an idea to market. Many companies fail to consider the benefits of open innovation in

this last phase and focus only on owned or familiar technologies or methods to deliver the

innovation. However, opportunities for external involvement during commercialization span

the value chain – from sourcing and manufacturing, to marketing and distribution.

Accelerating commercialization. First, companies can leverage external partners to

streamline and accelerate commercialization. For example, although Apple is

‘‘ Quality ideas arise from quality insights: about yourcustomers, your markets, your competencies and assets, andeven your own corporate orthodoxies. A wealth of compellinginsights can be gained by tapping the knowledge of externalpartners. ’’


well-regarded for its sleek product design and clever user interface, the company has also

been highly successful leveraging its supply base during commercialization. Apple focuses

on its competences in product design and user interface, while leaning heavily on its

supplier network to handle the complexities of the components within its successful

consumer product innovations. The original iPhone, for example, involved components from

at least 30 companies; even final assembly was outsourced. And for Apple, open innovation

extends to software as well. By allowing external developers to write Apps for the devices,

Apple leverages the entire user and developer community, rendering Apple’s devices more

valuable to users.

Airplane manufacturer Embraer provides another compelling example of using open

innovation to accelerate commercialization. In 1999, Embraer identified an unserved market

and decided to develop a new line of airplanes to seat 70 to 110 people. However, to get a

leg up on its competitors, it needed to build a new platform and develop and integrate the

latest technologies into the new airplane very quickly. To make it happen, Embraer increased

the number of strategic partners that would deliver ‘‘subsystems’’ composed of many

components, thus reducing the number of suppliers. As a result, only 30 months after the

project to build a new plane kicked off, Embraer 170 was ready to fly. Since then, Embraer

has engaged several external parties in designing and building its aircraft, reducing

production costs and time.

Partnering to capture value. Second, companies can leverage external partners to fill in

missing links in the value chain, that limit the company’s ability to capture value from the

innovation. By this point in development, there should be a clear line of sight to how the new

venture will create value for customers. However, the company may not have the required

complementary assets in place within the value chain to capture that value. Leveraging

external partners may require negotiating away some portion of that captured value, but the

alternative is that the new venture fails to capture any value at all! For example, Adobe

successfully used several external parties to help achieve widespread distribution of its

Portable Document Format (pdf). Adobe signed an agreement with Microsoft that bundled

Acrobat Reader into its operating system. Adobe also partnered with AOL, the dominant ISP

at the time, which distributed Acrobat Reader to its millions of users. Adobe provided Adobe

Flash Player technology to Google and Yahoo! to enhance search engine indexing of the

Flash file format (SWF) making Adobe Acrobat documents more relevant and enhancing the

search industry leaders’ reputation for being comprehensive.[10]

Licensing innovation. Third, companies can license valuable IP, if an opportunity requires

commercialization capabilities or assets that differ radically from the company’s core

businesses. Game maker Rovio has relied heavily on licensing to extend the ‘‘Angry Birds’’

brand, the company’s popular mobile gaming app, into books, movies, and toys. Such an

approach allows Rovio to rapidly monetize its brand via channels that would be difficult or

impossible for the company to access on its own.[11]

Open innovation: managing external relationships

Once the initial opportunities for open innovation are identified, leaders need to consider the

nature of the relationship with external partners. Relationship types vary from transactional to

a full out acquisition. As a generalization, the later in the development cycle that the

relationship is established, the more formal and structured that relationship will be.

Regardless of the type of relationship, companies engaged in open innovation must balance

‘‘ Reaching beyond the boundaries of the organization will yielda more diverse set of ideas, unencumbered by the companyorthodoxies. ’’


the need to promote openness in the relationship, while also taking proactive steps to protect

their own interests.

Transactions. During idea-generation, relationships with customers, consumers,

design/developer communities, and idea scouts are likely to be transactional.

Crowd-sourcing, soliciting customer input, idea-broker engagements, and other

idea-sourcing activities are usually one-off activities that don’t involve long-term

relationships. The ‘‘compensation’’ to the idea originator can range from payment for

services rendered (idea broker) to free products or coupons (customers) to cash prizes.

Outside experts participating in ideation sessions may be satisfied with simply the

opportunity to learn from others in the room. For participants in web-based crowd-sourcing

platforms, the intellectual challenge and identity that can be gained through their

interactions may be reward enough.

Partnering. In contrast, idea-development and commercialization tend to involve

company-to-company relationships in which each player has more ‘‘skin in the game.’’ As

such, the relationships tend to be more formal, such as joint ventures, alliances, licensing

agreements and partnerships. Some general guidelines are worth remembering:

B Forge a common understanding of the strategic objectives, while ensuring the existence

of the operational components that will sustain it – metrics, processes, organizational

structures and governance.

B Seek partners with core competences that effectively complement your own competence

gaps. The relationships will be more sustainable if the partners are able to benefit from the

unique ‘‘know-how’’ they bring to the table.[12]

B Carefully detail the boundaries of interaction – in terms of markets, communication

mechanisms, and information sharing – and explicitly define the eventual ownership of

any intellectual property generated through the relationship.[13]

B Put in place mechanisms to prevent any unintended intellectual property leakage.

B Be willing and ready to adjust the relationship – size, scope, ownership structure – in

response to changes in the market or technology changes.[14]

B Consider the endgame: At what point is the relationship intended to dissolve? What are

the scenarios that would lead to dissolution of the relationship, either amicably or

contentiously?[15]

Venture partners. Venture investing is an increasingly popular option for companies

engaged in open innovation. Small bets early on can help ensure your company is able to

capture value from a new technology down the road. The trick to venture investing is to find a

venture capital firm that you trust and that fully understands your business. A good venture

capital firm will be well-connected to a broad network of start-ups, will be able to protect your

interests in crafting an investment deal and will ensure your firm a voice in the direction of the

start-up as it steers through its growth phase.

Acquisition’s risks/benefits. Last but not least, companies can acquire pioneering

businesses that possess deeply coveted technologies or capabilities that are central to

the company’s strategy. The benefit of an acquisition is that it allows companies to obtain

‘‘ In the technology sector, in-house venture funds that seek outand support promising external innovations offer a way toleverage outside resources for idea-development, providingthe resources that motivate entrepreneurs to turn their rawideas into market-ready opportunities. ’’


market-ready products and services without having to invest time and resources in

development. However, an ‘‘open innovation’’ acquisition implies the same risks and

uncertainties and post-acquisition-integration tasks as any other acquisition. Furthermore, if

a company is just getting started with open innovation, an acquisition is a risk-laden first

step. Given the numerous options available to access and share expertise in this age of

openness, acquisition should be reserved as an option of last resort after other approaches

have been considered.

Making open innovation work for you

The benefits of open innovation are straight-forward: a company is no longer constrained by

its own ideas, technologies and innovations. Yet for executives schooled in closed business

models, embarking on an open innovation journey entails a major leap of faith. Fears of

losing control of key capabilities, assets and technologies that create value for the company

tend to constrain the open innovation dialogue before it begins. But the primary question is

not, ‘‘How can my company capture all the value from our innovations?’’ Rather, the first

question leaders should be asking is, ‘‘How can my company create significantly more value

by leveraging external partners to bring many more innovations to market?’’ (See Exhibit 1.)

Of course, concerns about protecting the company’s interests are valid. But adopting an

open-innovation approach does not require wholesale replacement of all your current

innovation efforts. Look critically at your innovation process, understand where your new

venture business models are weakest, and honestly assess the points at which open

innovation could add some needed spark. Start small; take deliberate baby steps. Over time

you will find that reaching outside the company can breathe new life into your innovation

pipeline.

Notes

1. Henry W. Chesbrough, ‘‘A better way to innovate,’’ Harvard Business Review, July 2003.

2. ‘‘Siemens Technology to Business Center,’’ www.ttb.siemens.com/new/en/ttb-index.html

3. ‘‘Fiat Mio, the world’s first crowdsourced car,’’ www.ideaconnection.com/open-innovation-success/

Fiat-Mio-the-World’s-First-Crowdsourced-Car-00273.html

4. Guido Jouret, ‘‘Inside Cisco’s search for the next big idea,’’ Harvard Business Review, September

2009.

Exhibit 1 Where to aim open innovation

Idea-generation Idea-development Commercialization

You need to consider openinnovation if . . .

Ideas arise from a very limitednumber of novel insightsIdeas come only from a smallnumber of employeesThe same ideas continue to ariseIdeas are mostly incrementalIdeas fail to connect withconsumers or excite employeesIdeas are all focused on productsand not on other aspects of thebusiness model

A large proportion of innovationsare abandonedNew innovations fail to attainsustainable competitiveadvantageDay-to-day business crowds outtime & resources foridea-developmentIdea-development is a‘‘part-time’’ effort andaccountability is unclear

Commercialization costs oftenexceed forecastsCommercialization takes too longand often misses the marketwindowMissing links in the value chaininhibit value captureCommercialization relies onowned technologies andprocesses and existingdistribution channels

Sources of open innovation Experts for insight sessionsInsight scoutingCustomersInventor communitiesCrowd-sourcingIdea brokers

In-house venture-capital fundsand in-house incubatorsExternal venture capitalistsInnovation capitalistsSmall companies with innovativeproducts (acquisition)

Integrating suppliersLicensingDistribution partners


5. Satish Nambisan and Mohanbir Sawhney, ‘‘A buyer’s guide to the innovation bazaar,’’ Harvard

Business Review, June 2007.

6. Henry W. Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from

Technology (Harvard Business Press, 2003)

7. Nambisan and Sawhney (2007), op. cit.

8. Ibid.

9. ‘‘2011 IBM CEO: how to live to be 100,’’ eetimes.com, August 5, 2011, www.eetimes.com/

electronics-news/4218534/IBM-CEO-How-to-live-to-100.

10. Bhaskar Chakravorti, ‘‘The new rules for bringing innovations to market,’’ Harvard Business Review,

March 2004.

11. Nick Wingfield, ‘‘‘Angry Birds’ spreads wings,’’ Wall Street Journal, August 10, 2011.

12. Amy Muller, Jorge Rufat-Latre, and Dave Jones, ‘‘Delivering on the promise of open innovation,’’

Strategy & Leadership, Volume 38, No. 6, November 20, 2010.

13. Ron S. Fortgang, David A. Lax, and James K. Sebenius, ‘‘Negotiating the spirit of the deal,’’ Harvard

Business Review, February 2003.

14. David Ernst and James Bamford, ‘‘Your alliances are too stable,’’ Harvard Business Review, June

2005.

15. Joel Bleeke and David Ernst, ‘‘Is your strategic alliance really a sale?,’’ Harvard Business Review,

January 1995.

Corresponding author

Amy Muller can be contacted at: [email protected]


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Applying open Innovation

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