Monday, March 23, 2015

Open Innovation - Not As Different As You Think

Open innovation has been a fad in industry the last few years.   There are consultants who are doing seminars and writing books about it. (Heck, I’ve even addressed it in some seminars that I teach.)  But when you peel aside all the hype, it is not that different from how many companies have approached innovation for years.  But here is the problem.  While open innovation isn’t different from what has often been done, it is often done badly.  Innovation has been poorly managed for years and we are finally waking up to that fact.

Let me take a minute to clarify what I include in the term “Open Innovation.”  The term has been defined by many individuals in many different ways.  For my purposes, I will go with Henry Chesbrough’s definition, (1) “Open innovation is 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.”  Let’s look at how innovation is often managed today in the areas of using external product ideas, external process ideas, and external paths to market.

External Product Ideas

A driving principle in product development is to address your customer’s needs.  This idea has been embedded in innovation efforts for hundreds, if not thousands, of years.  The marketing departments in the 21st century industry conduct focus groups and market research to determine what the customers want. They then turn to R&D and ask them to create it.  In some cases, companies will even let the engineers and scientists talk with the customers to better understand the potential use and application.  Occasionally, customers will even adapt a product to create an entirely new innovative productive category.  An example of this is the mountain bike industry.  Mountain bikes, as a market segment, did not exist in the 1970s.  Some cyclists started to modify ordinary street bikes and as their numbers and enthusiasm grew, the bicycle manufacturers finally took notice and began to build the new style bicycle.

The challenge for most companies with respect to open innovation of new products is the old “not invented here” syndrome.  The product managers and technologists have invested time, energy, and sometimes their reputation on their products.  Their job is to create innovative new products.  If someone else comes up with the idea, it is perceived as a threat to them.   They have no ownership in the new innovation that is suggested by the customers.  They are willing to embrace the customer needs that “tweak” the current product or that align with the innovation projects they have underway.  However, there is often resistance to any truly novel product idea that comes from a customer. 

So what should a business do?  A significant portion of the innovation effort (that means budget and people) should be focused on customer innovation.  This is not to exclude internal innovation efforts, but rather to create a parallel path that will intersect with selected product and customers.  This is an organizational response to the challenge of open innovation for new products.  There needs to be an advocate in the business for the open innovators; an advocate whose primary purpose and measurements are the identification and adoption of open innovation ideas. 

External Process Ideas

Many companies are already using a form of open innovation for process innovation.  Companies benchmark their processes for speed, cost, and quality against competitors or industry norms.  When they see a performance gap, they hire a company to fix their process.  This may be an IT firm to bring in a new application.  That is the reason many companies transitioned to ERP.  This may be a process automation firm to re-engineer a manufacturing or business process.  Often the entire process is outsourced to a company that specializes in that process.   Numerous companies have outsourced their entire delivery process to companies such as FedEx and UPS.   This is open innovation.  A company is using an innovative technology to fundamentally change the way they do business.

The challenge here is that many companies don’t think of this as a technology innovation activity, but rather as a sourcing activity.  They let their purchasing department manage the innovation.  Now, I like the people in purchasing, but their processes typically are not optimized for managing innovation contracts.  They usually want to negotiate and manage a contract with a fixed and specific definition of what is being purchased, a specified schedule, and no changes.  However, when conducting open process innovation, there is only a general description of what must be done – the details must be discovered, the timing of many activities is unpredictable, and there are numerous changes.  It is not surprising that chaos, frustration, and animosity are often the by-products of this approach.

So what should businesses do?  They need to create a process or procedure for how process innovation contracts will be managed.  They need to train the purchasing people who will be responsible for these contracts in the nature of innovation and how they can accelerate it and refine it with the terms of the contract.  In many cases, a process innovation contract will also require the oversight of an in-house technical expert.  The roles of that individual with respect to supplier interaction and direction must also be clearly defined.

External Paths To Market

The last area of open innovation is the use of an innovation partner to expand your products into new markets.  Again, may companies have at least tolerated this if not out-right promoted it for years.  They create a distribution network and let the distributors becomes the experts on product application in their local market segment.  A recent twist on this approach is the creation of an open platform that allows others to create applications that they sell using the platform as a foundation.  The more items they sell, the greater the need for the basic platform.  A perfect example is the App Store at Apple.

The typical challenge in this area has been one of managerial neglect.  As long as the distributor kept ordering product, the parent company often did not pay much attention to how the distributor sold the product.  The distributor may make modifications to the product or prepare additional product literature that is customized to the local application.  That was not of concern to the parent company.  What is missed here is that one distributor’s good idea may be of value to other distributors in other markets, but often there is no avenue for sharing that information.

So what should a business do?  Open up a forum, either face-to-face or online, where distributors and retailers can share their ideas and get credit for them.  Unless there is “something in it” for the distributor, there is no incentive to share ideas.  This innovation forum should reward and recognize innovative applications on a regular basis.

The concept of open innovation is not difficult to understand.  It just isn’t something that most companies do.  The organization and management systems do not encourage or reward it.   

(1) Chesbrough, Henry William (1 March 2003). Open Innovation: The new imperative for creating and profiting from technology. Boston: Harvard Business School Press.

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