Open Innovation: Open up your mind

“Combining internal and external ideas as well as internal and external paths to market to advance the development of new technologies.”

Henry Chesbrough, adjunct professor and the executive director of the Center for Open Innovation at the Haas School of Business (University of California, Berkeley), coined the term open innovation. Also, he wrote Open Innovation: The New Imperative for Creating and Profiting from Technology (2003); Open Business Models: How to Thrive in the New Innovation Landscape (2006) and Open Innovation: Researching a New Paradigm (2006).

 

Traditionally, new business development processes and the marketing of new products took place within the firm boundaries. However, this model has changed during the last years, mainly thanks to:

– Society changes such as the mobility and availability of highly educated people, which implies large amounts of knowledge apart from companies R&D department;

– The availability of venture capital, which gets ideas and technologies developed outside firms;

Thus, these opportunities have moved companies to look for other ways to increase the efficiency & effectiveness of their innovation processes. For instance, taking into account the previous ideas but also through cooperation with suppliers and competitors, in order to create customer value.

Companies such as Procter & Gamble, Cisco Systems, Genzyme, General Electric and Intel are often credited withhaving attained market leadership through open innovation strategies.

Procter & Gamble (P&G  from now on) has operated one of the greatest research and development operations in corporate history. Most mature companies have to create organic growth of 4 % to 6 % year in, year out, i.e. for P&G this means building a $4 billion business this year alone. For generations, P&G created most of its phenomenal growth by innovating from within. That worked well when it was a $25 billion company; today, it is an almost $70 billion company.

By 2000, P&G admitted that its invent-it-ourselves model was not capable of sustaining high levels of top-line growth. New technologies put ever more pressure on its innovation budgets, R&D productivity has leveled off and its innovation success rate—the percentage of new products that met financial objectives—had stagnated at about 35 %. P&G felt squeezed by nimble competitors, flattening sales, lackluster new launches, and a quarterly earnings miss, losing more than half its market cap when its stock slid from $118 to $52 a share.

It was time to change, so A.G. Lafley (P&G CEO) challenged his workers to reinvent the company’s innovation business model. P&G had not changed it since the late 1980s when discovered that important innovation was increasingly being done at small and midsize entrepreneurial companies.

Until that very moment, most of P&G’s best innovations had come from connecting ideas across internal businesses and after they cheacked out that also external connections could produce highly profitable innovations. Betting those last ones were the key to future growth, Lafley made their our goal to acquire 50% of its innovations outside the company. As a result, they estimated that for every P&G researcher there were 200 scientists or engineers elsewhere in the world who were just as good—a total of perhaps 1.5 million people whose talents they could potentially use.

These changes also implied P&G needed to move the company’s attitude from resistance to innovations “not invented here” to enthusiasm for those “proudly found elsewhere” as well as redefined its R&D organization with a permeable boundary between people inside and outside. Today, results speak for themselves:

+ More than 35% of its new products in market have elements that originated from outside P&G, up from about 15% in 2000;

+ 45% of the initiatives in its product development portfolio have key elements that were discovered externally;

+ P&G’s R&D productivity has increased by nearly 60 %, meanwhile the investment as a percentage of sales is down from 4.8% in 2000 to 3.4% today;

+ Its innovation success rate has more than doubled, while the cost of innovation has fallen;

+ In the last two years, P&G has launched more than 100 new products for which some aspect of execution came from outside the company;

+ Five years after the company’s stock collapse in 2000, they have doubled its share price and have a portfolio of twenty-two billion-dollar brands.

 

What’s more do you need to join to open innovation?

 

References:

http://www.openinnovation.net/featured/seven-ways-to-make-open-innovation-work-in-europe/

http://bulletin.sciencebusiness.net/news/75615/7-ways-to-make-open-innovation-work-in-Europe

http://www.openinnovation.eu/open-innovation/

http://www.openinnovation.eu/13-01-2012/what-trends-make-innovation-managers-sweat/

http://www.openinnovation.eu/04-12-2011/5-steps-towards-open-innovation/

http://www.openinnovation.eu/31-01-2012/3-aspects-in-which-open-innovation-companies-distinguish-themselves-results-from-science/

http://www.openinnovation.eu/29-12-2011/the-best-open-innovation-posts-of-2011/

http://www.openinnovation.eu/02-02-2012/6-leading-pharma-players-join-forces-to-beat-costs/

http://www.openinnovators.net/list-open-innovation-crowdsourcing-examples/

http://hbswk.hbs.edu/archive/5258.html

http://www.pg.com/en_US/downloads/innovation/C_D_factsheet.pdf


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