Open innovation is an idea that's really come upon the scene recently. And it is an idea that really is an innovation strategy that is going to change the way in which innovation has happened. And so we're going to look at how that happens. The era of open innovation is basically an idea that is emanated from Henry Chesbrough. He wrote a classic article in the Sloan Management Review back in 2003. And it really launched the thought process and the consideration of this strategy as a useful strategy in innovation circles. And so first we'll look at a closed innovation model, and then we'll look at an open innovation model. And first of all, a closed innovation model is typically what has been happening, the way in which innovation has happened. It's generally been driven by innovations happening only within a firm's boundaries. So firms did research and development and then they put out an innovation. And so they recruited top talent for their internal research and development functions and that's where the ideas generated. And they filtered those ideas internally, and they form them for a particular market. And you can see in this, it's a funnel where all of the ideas and the research and the novelty and the creativity is contained within the boundaries of a firm, and goes out into development. And so why do people use the closed innovation model? And some of the premises are that well, we feel that we have to control every aspect of product development. We want to get to market faster, we want to hold on to what we call first mover advantage, and we want to control the intellectual property. So the competitors can't benefit from this. So, we then once we get the product out in the marketplace, then we re-see that profit and that benefit back into the company, back into the research and development and we create the cycle all over again. So that was the model of closed innovation and it had a pretty strong rationale and it's still used by some firms. So let's now look at the open innovation model, and the concept of the open innovation model is that you go beyond the boundaries of your own firm. You use external resources, external talent, external intellectual property. And you, by doing so, expand your potential market space. And so, what you see in this diagram here is a permeability of the boundaries of the firm where research goes out and research comes in from external sources. And but still they all get focused and in to development and they all get focused in to developing innovated products that go in to the market place. And so the rationale for open innovation is that not all the smartest people work for us. Sometimes they're more Interesting and more creative and smarter people out there who are doing things that we can't do that we can't hire, people we can't hire, and so, we argue that we don't always have to originate the research and development on our own in order to profit from it. And so, usually better business models can typically beat a first mover advantage. And so the premise of a closed innovation model was that you could make it into the marketplace sooner than anybody else. And now with the open innovation model, that's not necessarily true. It's a different model, a different way of doing things, and you don't necessarily get stuck by not being able to be a first mover. And so you can profit when others use your intellectual property, so what you produce is useful for other people and you can readily buy other people's intellectual property in an open innovation. And so here we compare the open and closed innovation processes, and internally, you notice that these same things, knowledge exploration, knowledge retention, and knowledge exploitation all happens inside the firm. And the attitude is that we don't need to be connected. We don't need to be, if it's not invented here, it's not any good, and we can sell it whatever we make. And externally it's just kind of the flip side of that Is where you have an attitude that you can buy in knowledge that you don't have, you can relate to other knowledge retention, and you can also sell some of your knowledge to other people. And you just need to find and make the connections. So here is an example of a comparison of really two types of diagrams, closed R&D and open R&D. And basically, it's an elaboration of the earlier diagrams where you see There's no permeability in the left-hand side and there's permeability of the company in the right-hand side and ideas coming in, research comes in, and electro property comes in. All these things in effect permeate the boundaries of the firm in an open R&D process. And so what are the enablers of open innovation? How do we make it work? And one of the enablers is that because of the high mobility of knowledge workers, you can create collaborative software. You can create a lot of communication between knowledgeable people, and you can actually also secure the transfer of valuable information with instruments, legal instruments and technological instruments. And so that's something that has made a lot of this possible. And there's also another thing that has enable to open innovations is a growing availability of venture funds. Where investors are willing to see the high payoff and the big wins that bring speculation and investment into this market. And so proven ideas actually bring in less speculative money. And so, it's the positive investment demand that happens with open innovation. And open innovation pay off also has to match up with the risk that's there. What we want to now look at is four types of innovation generators. Who are the people who are generating innovation and sources of innovation, and we can classify them. One would be we could call the explorers, the basic research discovery research, things like the naval research lab or the Sandia National Laboratory, or some of the many, many a government funded organizations, there's one type of innovation generator. Another type is what we call the merchants, where like Qualcomm, where they commercialize their innovations and their intellectual property and then make it available to other people but they commercialize it. Then a third type is what we've called architects that are generating innovations, and they're generating innovations because they are architecturally assembling different innovative pieces into parts of a larger system. And so they enable others to develop system parts. They enable others to become players in that larger system game. And then finally, the missionaries are innovation generators, people like Linux, where they advance innovation for a cause, like open space software. There are organizations like this that are basically pushing innovative ideas and they generate further innovation out there. So we start with the innovation generators and then we say okay if we have innovation generators, how do they get funded? Typical innovation investors in for instance in closed innovation, only the firm funds that and so sometimes, people like venture capitalists and angel investors and small business investment councils fund innovation. But those, you know, are different ways in which innovation can be funded. Now innovation benefactors, on the other hand, they focus on early stage development, and they will fund innovations that benefit their own industry. And so examples of innovation benefactors, people who provide the broad forms of innovation and push the notion of of greater innovation funding and greater open innovation, people like the National Science Foundation, different philanthropies, different foundations. They're the ones who are the benefactors, who are pushing things out there. So, when you commercialize open innovation, people like Pfizer or Intuit, they identify needs within a given market and basically determine. The external innovations to bring in. So they're marketing an innovation, and what they're doing is identifying what the need is and then putting it out. So that's really market pull innovation. Other examples of ways to commercialize open innovation are through one-stop centers like Yahoo or Google business unit sites that develop comprehensive solutions. They develop frameworks for other businesses to develop and other innovators to develop their businesses. So they actually try to deliver solutions regardless of who innovates. And so they don't care what the innovation is, they care about how to bridge an innovation into the marketplace. And so the takeaway here about this is that between open innovation and closed innovation is this centralized research and development is actually beginning to become obsolete. Firms are recognizing that the intellectual property and the value of aspects of innovation that they might need could more readily be achieved and more readily acquired by going outside the firm and open innovation approach you seen is really the future in many if not most industries. Then companies actually can benefit by harnessing their own internal ideas, their own innovate seas and translating it to conceivably during electoral property or creating some form of alliance with firms that can benefit from the excess and not necessarily usable innovative ideas that some company creates that can be used by another company. So where firms actually focus on core marketing and operations and finance competencies, innovators can actually innovate. So what they really want to do is have people do business the best way they can do business, and draw upon the wide range of innovation sources and opportunities that come with open innovation so that you can manage the firm in the best way that strategically makes sense.
