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Open innovation is “the use of purposive inflows and outflows of knowledge to accelerate internal innovation and expand the markets for external use of innovation.” It’s a model for industrial innovation that I originated in my 2003 book, Open Innovation. Since that time, the concept has been adopted by most large companies in the U.S. and Europe and cited in thousands of academic articles.
Open innovation assumes that companies can, and should, use external ideas as well as internal ideas, and pursue internal and external paths to market, as they look to advance their innovations. Open innovation processes combine internal and external ideas into platforms, architectures, and systems. Open innovation processes use business models to define the requirements for these architectures and systems. These business models access both external and internal ideas to create value while defining internal mechanisms to claim some portion of that value.
A traditional innovation process is closed because projects can only enter it in one way, at the beginning from the company’s internal base, and can only exit in one way, by going into the market. Under this closed model of innovation, research projects are launched from the science and technology base of the firm. They progress through the development process, and some projects are stopped while others are selected for further work. A few successful projects are chosen to go through to the market.
Contrast that with the open innovation model, in which projects may enter or exit at various points and in various ways. Here, projects can be launched from either internal or external technology sources, and new technology can join the process at various stages. As well, projects can make their way to market in many ways, through out-licensing or via a spinoff venture company, for instance, in addition to going through the company’s own marketing and sales channels.
A more recent development is the consideration of how innovation plays out in service businesses. Most of the top 40 economies in the Organization for Economic Cooperation and Development (OECD) get half or more of their gross domestic product (GDP) from that sector, and many companies are witnessing a shift to services as well.
More generally for services, innovation must negotiate a tension between standardization and customization. The former allows activities to be repeated many times with great efficiency, spreading the fixed costs of those activities over many transactions. The latter allows each customer to get what he or she wants for high personal satisfaction. The problem is that standardization denies customers much of what they prefer, while customization undermines the efficiencies available from standardization.
The resolution to this dichotomy is to construct service platforms, which invite others to build on top of your own platform offering. This allows economies to emerge from the standardization of the platform, and it creates customization through the addition of many others to the platform. A fundamental premise of open innovation is that “not all the smart people work for you.” That means that there’s more value in creating the architecture that connects technologies in useful ways to solve real problems than there is in creating yet another technological building block. System architecture, the system integration skill to combine pieces in useful ways, becomes even more valuable in a world where there are so many building blocks that can be brought together for any particular purpose.
Platform leadership is the business-model side of systems integration. A successful platform requires a business model that can inspire and motivate customers, developers, and others to join the platform. The model must be designed to allow those third parties to create business models that work for them, even while the business model works for the platform creator. In that way, their activities increase the value of the core business, and their investment makes the platform business more valuable.
Open innovation was first understood and implemented as a series of collaborations between two organizations to open up the internal innovation process. Today, though, we see many instances in which the concept is being used to orchestrate a significant number of players across multiple roles in the innovation process. Open innovation is going to expand well beyond collaboration between two firms, and designing and managing innovation communities is going to become increasingly important to the future of open innovation.
Furthermore, open innovation’s effectiveness is not restricted to a few select corporations. It is a process that makes more effective use of internal and external knowledge in every organization, whether old or young, large or small, public or private.
This article is adapted from a longer version. Read the full article here.