In January, UC Berkeley professor Henry Chesbrough published Open Innovation Results: Going Beyond the Hype and Getting Down to Business, his fourth book on innovation in the last two decades. Chesbrough is adjunct professor and faculty director of the Garwood Center for Corporate Innovation at UC Berkeley’s Haas School of Business. He’s credited with coining the term open innovation in his 2003 book of the same title.
Open innovation is the antithesis of the vertically integrated, closed innovation approach followed by industrial R&D labs through much of the 20th century. As the rate and pace of technological advances accelerated, - most prominently in the IT industry, - the closed innovation model started to fall apart. The elapsed times to take an invention from lab to market were no longer competitive, especially against a new generation of startups that significantly decreased the time-to-market for new products and services. Companies realized that they could no longer rely on their own R&D as the only source of innovative ideas.
Moreover, as innovation was now being applied to broader and more complex problems, external collaborations with clients, business partners, universities, open source communities and others became increasingly important. Given the fast moving, highly competitive environment, firms recognized that there were a lot more capabilities for innovation in the marketplace than they could possibly create on their own, no matter how big and powerful the company. The dramatic success of the Internet, World Wide Web, Linux and similar initiatives in the 1990s ushered this new era of open, collaborative innovation.
In his recent book, Chesbrough takes a close look at the current state of open innovation and sees a mixed picture. On the positive side, open innovation has been widely accepted and adopted. A quick search for ‘open innovation’ yields over 600 million page links, compared to about 200 when his first book came out in 2003; on LinkedIn, there are now tens of thousands of jobs with ‘Open Innovation’ in their title, compared to hardly any back then.
But, its promise has been overhyped. While open innovation has increased exponentially, productivity and income levels have been stagnant or declining, a phenomenon Chesbrough calls the exponential paradox. In the US and other Western economies, “technological advance is growing exponentially, but economic productivity is actually declining.” Average annual productivity grew at 1.9% between 1947 and 1969, but at only 0.8% from 1970 to the present. And, since productivity drives long term economic growth, average incomes have also been growing slowly or stagnating over the past several decades.
“Indeed, one of the sad results of these troubling trends is that most US citizens expect that their children will not live as well as they themselves did,” notes Chesbrough. “This is a dramatic sea change from earlier generations in the US. The American dream was built in part on… the comfort that your children would likely have a better life than you did.”
Economists have offered alternative explanations for this puzzling paradox, including: digital products and services are impacting our lives in ways that are hard for economists to measure; digital technologies, exciting as they might be, aren’t as transformative as the technologies from the period between 1870 and 1970; and there’s a significant time lag between the broad acceptance of a major transformative technology and its impact on productivity and economic growth.
While acknowledging the merits of these various explanations, Chesbrough argues that “the root of the problem is in how we are managing and investing in innovation, both inside individual organizations and also in the larger society.”
Let me summarize the book’s central thesis, starting with its definition of open innovation. Basically, open innovation means that instead of doing everything inside the four walls of the business, the innovation is generated by accessing, harnessing and absorbing external knowledge across the firm, both flowing in and going out. But, it isn’t enough to simply create or locate useful knowledge. A well-functioning innovation infrastructure must operate across three critical dimensions:
- generation, - new technology discoveries start the process, which, at this stage, only benefit a small number of early adopters;
- dissemination, - the new discoveries then spread throughout the organization, from the R&D innovation groups that first developed them to the business units that take them to the marketplace; and
- absorption, - the new products and services are embedded in the organizational units and business models that can scale and sustain the innovation throughout the economy.
“We must extend beyond the creation of new technologies, to also include their broad dissemination and deep absorption, in order to prosper from new technologies,” writes Chesbrough. “We distract ourselves with the ‘shiny new objects’ that arise from the advance of technology. All too often, the front end of the innovation process is not connected to the businesses that are to commercialize any new technologies… To realize the potential from exponential technologies, we must refocus our attention on the things that really matter in innovation (instead of simply starting another one and blithely ignoring what happens afterwards). That will require us to rethink innovation, both inside organizations and in society as a whole.”
The book offers a number of recommendations for rethinking open innovation in order to achieve better business outcomes. These include:
Outside-in and inside-out open innovation. The outside-in part of open innovation, - e.g., open source, collaboration, licensing, acquisition, - has received the greatest attention in academic research and business practices. But inside-out innovation, which is less well understood, is also very important. Inside-out innovation makes it possible to get value from unused or under-utilized technologies and knowledge by going outside the organization, - through licensing, joint ventures, or contributions to an open source project.
Business model innovation. Companies have generally associated innovation with the development of new technologies within the R&D organization, while viewing the business model as fixed. But this has been changing. Making business models more adaptive allows companies to obtain more value from their technology innovations. Interest in business model innovation has been growing in a number of areas, including two-sided platforms and the blurring boundaries between products and services.
Open services innovation. Services innovation enables a company to shift a product business into a recurring services business and thus avoid the challenges of being stuck in a commodity trap, where there is little differentiation between competing products. Instead of, for example, selling a jet engine, - a product transaction, - the company can lease the engine, offering ‘power by the hour’ with the opportunity of aftermarket sales and services, spare parts, and other benefits that accrue through the multi-decade operating life of the engine.
Open innovation in networks and ecosystems of organizations. Beyond individual firms, open innovation increasingly involves the surrounding environment, including networks and ecosystems of organizations that play different roles in the innovation process. “Put simply, designing and managing innovation communities is going to become increasingly important to Open Innovation’s future. This is true both for firms, and for the larger society in which these firms operate… For Open Innovation to thrive, we need to build ecosystems of innovating organizations.”
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