Open innovation is a term used to promote an information age mindset toward innovation that runs counter to the secrecy and silo mentality of traditional corporate research labs. The benefits and driving forces behind increased openness have been noted and discussed as far back as the 1960s, especially as it pertains to interfirm cooperation in R&D. Use of the term ‘open innovation’ in reference to the increasing embrace of external cooperation in a complex world has been promoted in particular by Henry Chesbrough, adjunct professor and faculty director of the Center for Open Innovation of the Haas School of Business at the University of California, and Maire Tecnimont Chair of Open Innovation at Luiss.
The term was originally referred to as “a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology”. More recently, it is defined as “a distributed innovation process based on purposively managed knowledge flows across organizational boundaries, using pecuniary and non-pecuniary mechanisms in line with the organization’s business model”. This more recent definition acknowledges that open innovation is not solely firm-centric: it also includes creative consumers and communities of user innovators. The boundaries between a firm and its environment have become more permeable; innovations can easily transfer inward and outward between firms and other firms and between firms and creative consumers, resulting in impacts at the level of the consumer, the firm, an industry, and society.
Because innovations tend to be produced by outsiders and founders in startups, rather than existing organizations, the central idea behind open innovation is that, in a world of widely distributed knowledge, companies cannot afford to rely entirely on their own research, but should instead buy or license processes or inventions (i.e. patents) from other companies. This is termed inbound open innovation. In addition, internal inventions not being used in a firm’s business should be taken outside the company (e.g. through licensing, joint ventures or spin-offs). This is called outbound open innovation.
The open innovation paradigm can be interpreted to go beyond just using external sources of innovation such as customers, rival companies, and academic institutions, and can be as much a change in the use, management, and employment of intellectual property as it is in the technical and research driven generation of intellectual property. In this sense, it is understood as the systematic encouragement and exploration of a wide range of internal and external sources for innovative opportunities, the integration of this exploration with firm capabilities and resources, and the exploitation of these opportunities through multiple channels.
Open innovation offers several benefits to companies operating on a program of global collaboration:
- Reduced cost of conducting research and development
- Potential for improvement in development productivity
- Incorporation of customers early in the development process
- Increase in accuracy for market research and customer targeting
- Improve the performance in planning and delivering projects
- Potential for synergism between internal and external innovations
- Potential for viral marketing
- Enhanced digital transformation
- Potential for completely new business models
- Leveraging of innovation ecosystems
Implementing a model of open innovation is naturally associated with a number of risks and challenges, including:
- Possibility of revealing information not intended for sharing
- Potential for the hosting organization to lose their competitive advantage as a consequence of revealing intellectual property
- Increased complexity of controlling innovation and regulating how contributors affect a project
- Devising a means to properly identify and incorporate external innovation
- Realigning innovation strategies to extend beyond the firm in order to maximize the return from external innovation