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What Is Open Innovation?

25.10.2013
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How can we define open innovation? In simple words, open innovation integrates external resources from outside the boundaries of a company into the innovation process. This can be user communities, customers, independent experts, suppliers or whoever can provide input. The internet and social media in particular increasingly allow institutions to create a flow of ideas and information through formal institutional borders between its employees, suppliers and customers.

In the traditional model, innovation takes place behind the closed doors of companies' research departments. This has the advantage that the innovation is entirely owned by the company and can be fully exploited until its competitors catch up and introduce similar products. The disadvantage is that the company's internal resources are likely to be much more limited than large communities of users or experts. Opening up the inner workings of products can also keep companies on the edge and avoid complacency. It reduces the risk of product development that fails to meet the customers' taste.

In a way, open innovation is nothing new. Pharmaceutical firms, but also companies from many other industries have long worked with independent academics or specialized research companies during the research phase of the products. But these cooperations are governed by elaborate contracts with extensive disclosure and other legal agreements. The term open innovation rather describes a culture of opening up a company's innovation process to outsiders.

A key aspect is the ownership of ideas and innovations. Businesses are often cautious of introducing open innovation, fearing that everybody can then use their ideas. In turn, outside communities and experts are also cautiously watching whether a company just tries to use them to outsource its research efforts and not pay for it. For example in software development, open licensing allows everybody to use the code that has been jointly developed and make more changes to it. Here, a company needs to calculate whether its still pays off to publish its source code. Large IT and software companies benefit when small companies develop add-on applications based on the open source code of an operating system. This makes their entire eco-system of products -- others of which need to be paid for -- more valuable to customers, making it less likely they will switch to competitors. One example are manufacturers of smart-phones.

From a business perspective, open innovation might not make sense for each and every product that a company has in its portfolio. This is particularly true in the wide range of companies between small start-ups that often bet on open innovation and large corporations that have the cloud to attract additional business onto their open benchmark platforms. A product might be so far ahead of the competition that publishing its inner workings might only help the competition catch up. Not all products are equally suitable for outside input: Everybody can say whether he likes the design of a consumer product and give feedback on teething problems that the manufacturer can then solve as the product cycle evolves. But when pharmaceutical companies publish their research findings in areas where they got stuck, still only a few outside experts might have the knowledge required to advance the research.

There are many shades in between these two extremes. But the decision whether or not to introduce open innovation to a company's business model in many cases still does not depend on a cool-headed answer to the simple question: what's in it for my business? In many cases the decision is still influenced by a culture that places guarding one's knowledge above a broad-based innovation process.

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