Digital Strategy & Innovation

Open Innovation: A Simple Theory Difficult In Practice

The current scenario of strong discontinuity has pressured companies to revise the traditional concept of innovation. Among the causes, in addition to the digital disruption phenomenon characterized by the rapid evolution of digital technologies and the start of new trends such as Big Data, Internet of Things and Mobile, there are factors such as migration and demographic trends that are engulfing our planet and changing our lifestyles, social values and decision-making processes. The overall effect is the rise of costs of innovation, that has become increasingly fast and risky, and the reduction of profit margins and of products/services’ lifecycle that, on average, is growing shorter and shorter. All this has made the traditional approach to innovation detrimental and uneconomical.

In his essay “The era of open innovation” (2003) – a milestone in “open innovation” literature – Henry Chesbrough looks to this transformation with foresight, focusing on the “closed” innovation model that is typical of companies to propose an “Open” innovation model which, in his own words “is a paradigm that assumes 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”.
In essence, Chesbrough champions a simple idea: riddle the traditional innovation funnel to allow internal innovation to exit (Inside-out) and at the same time allow external innovation to enter the organization (Outside-in).
Inside-out is the process that translates internally generated innovations into external business opportunities through, for example, Licensing, Spin-offs, Sale of inventions (i.e. patents), commercial Joint Ventures. This transforms internal innovation – possibly unlinked to the company’s business model – into diversification and new revenue sources thus countering the first element of financial crisis, that is, a reduction of profitability caused by shorter product lifecycles.

The second process (Outside-in) leverages externally generated innovation, not only from traditional suppliers but especially from new alternative sources. According to research conducted by the Digital Innovation Observatory, a comparison of the players that will constitute the sources of stimulus and innovation over the next three years highlighted that “traditional” sources of innovation are almost all decreasing; some quite significantly, such as Vendors, Sourcers and consulting Firms. Other innovation sources, that have not had the same impact to date are now rising: internal research units, Universities, and Research Centres, clients, companies in other sectors and, most of all, startups. Many companies have already undertaken Outside-in actions, moving across collaborations with Universities and Research Centers, working with Partners on scouting consolidated companies, and developing Startup Intelligence projects. In theory Outside-in actions enable to directly act on the second element of the balance sheet, reducing costs and innovation time. It is in fact possible to move development costs to external sources, or to share them, rely on combinations of competences and leaner and faster organization models leveraging and valorizing at best the most outstanding innovations available on the market, bringing them into the company’s business model.

What makes this apparently simple theory so complex to actualize?
Companies that have approached Open Innovation know it well. It means transferring an entire cultural paradigm that is very far from the prevailing customs of companies, which, especially in recent crisis years have exacerbated the attention on figures and quarterly results. It means valorizing vocational skills, such as curiosity and spirit of collaboration. It means shifting from an approach based on control to responsibility accountability on objectives. And this implies rewarding in-company entrepreneurship, or Intrapreunership and everything connected: the possibility of experimenting, the right to make mistakes, accepting risk.

How many Boards of Directors are ready for this?

Alessandra Luksch

Alessandra Luksch

Digital Transformation Academy Observatory Director
Alessandra Luksch

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