What Is Open Innovation And Why It Matters In Business

Open innovation describes a situation where a business does not rely on its internal knowledge or resources for innovation. They instead source ideas from external sources through the sharing of knowledge and, in some cases, collaboration with other businesses.

Aspect	Explanation
Concept Overview	Open Innovation is a business and innovation strategy introduced by Henry Chesbrough. It challenges the traditional closed innovation model where companies primarily rely on their internal resources and ideas. Instead, open innovation emphasizes the importance of collaboration, knowledge sharing, and the integration of external ideas and technologies to drive innovation and business growth. It recognizes that valuable ideas can come from both inside and outside an organization.
Key Principles	Open innovation is guided by several key principles: 1. Outside-In Perspective: Companies actively seek external ideas, technologies, and partnerships. 2. Inside-Out Perspective: Companies also look to commercialize their own intellectual property by licensing or selling it to external parties. 3. Collaboration: Collaboration with external partners, including customers, suppliers, startups, and universities, is crucial for success. 4. Value Creation: The focus is on creating value, whether through new products, services, cost savings, or revenue generation. 5. Ecosystem Building: Companies often create innovation ecosystems to foster collaboration and idea exchange.
Types of Open Innovation	Open innovation can take various forms: 1. External Technology Sourcing: Acquiring external technologies or intellectual property through partnerships, licensing, or acquisitions. 2. Crowdsourcing: Engaging a broader community, such as customers or the public, to generate ideas or solve problems. 3. Joint Ventures and Alliances: Collaborating with other companies to jointly develop new products or technologies. 4. Open Source: Sharing software code or technology with the public or the developer community. 5. Innovation Challenges: Issuing challenges or competitions to external innovators to solve specific problems.
Applications	Open innovation is applied in diverse sectors and industries: 1. Technology: Technology companies use open innovation to access cutting-edge research and development. 2. Healthcare: Pharmaceutical companies collaborate with academic institutions for drug discovery. 3. Manufacturing: Manufacturers partner with suppliers to improve supply chain efficiency. 4. Consumer Goods: Companies engage consumers in co-creation of products and services. 5. Energy: Energy companies collaborate on sustainable energy solutions.
Benefits	The strategy offers several benefits: 1. Accelerated Innovation: Access to external knowledge accelerates the innovation process. 2. Reduced Costs: Sharing R&D costs and risks with partners can lead to cost savings. 3. Market Expansion: Collaboration can help companies enter new markets and diversify their offerings. 4. Increased Flexibility: Open innovation allows organizations to adapt to changing market conditions and technologies more quickly. 5. Enhanced Competitive Advantage: It can provide a competitive edge by accessing unique resources and ideas.
Challenges	Challenges in implementing open innovation include intellectual property management, cultural barriers, and the need for effective collaboration and communication with external partners. Companies must also strike a balance between protecting proprietary information and sharing it for innovation.

Table of Contents

Understanding open innovation

Open innovation was developed by academic Henry Chesbrough, who believed that it could be used to increase product quality and variety and also shorten the time it took to bring new products into the market.

Chesbrough also noted that open innovation would help a business share internally derived innovation with others if it did not fit its business model.

Businesses can also look at external sources of innovation such as customers, external agencies, and published patents.

But whatever the source, those who openly innovate have a genuine belief that internal expertise is not sufficient enough to help them reach strategic goals.

Types of open innovation

types-of-innovation — According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).

While there are myriad ways to openly innovate, some of the most common include:

Intracompany –some may argue that intracompany innovation is not a form of open innovation, yet it nevertheless exists in large companies with different functions or business units.
Intercompany – innovation between two or more separate companies.
Consultancy – where a business seeks the input of relevant experts.
Publicly open – as the name suggests, inputs are sought from anyone in the general public.

Once a business has chosen the source of innovation, it can apply it to various purposes.

These include scouting for talent and gathering data for market and consumer insight.

However, most openly innovate for research and development of new products and services.

Advantages and disadvantages of open innovation

Advantages

Expanding the pool of knowledge

Chesbrough notes that useful knowledge is widely distributed across the globe and that no company has the answer to every question.

Lower innovation costs

Businesses can get access to ideas that other businesses have already spent money on developing.

This saves them a tremendous amount of upfront capital.

Increased credibility

New businesses, in particular, will find value in partnering with more established businesses to increase credibility, market share, and brand equity.

Disadvantages

Cost

The cost of open innovation can be prohibitive to smaller, less experienced companies – particularly if they inadvertently give away their competitive advantage.

Intellectual property (IP) rights

Two or more businesses that work successfully on bringing a new product to market may face disputes when assigning intellectual property rights.

Businesses should always prioritize their reputation over lengthy and sometimes public disputes over such rights.

Real-world examples of open innovation

Consumer household goods maker Phillips is well known for quality and usability across a broad range of products.

In 1998, the company created the Philips High Tech Campus where other companies and a technical university could come together for research and development.

In more recent times, Philips has partnered with hospitals to tackle problems such as affordable healthcare and energy-efficient lighting in cities.

Netflix has also used open innovation in the public sphere.

In 2006, the company created a challenge called Netflix Prize in their quest to develop an algorithm that improved user movie suggestions.

With a cash price of $1 million, 40,000 teams across 186 countries entered the competition.

The initiative was so successful that Netflix used elements of both the #1 and #2 ranked algorithms to increase user engagement.

Open innovation vs. closed innovation

In a closed innovation environment, organizations build their competitive moats through proprietary technology, which underlying work might not be shared across the business ecosystem.

Meaning users might be able to use the service for free. But developers might not be able to develop on top of it freely.

Take the case of Google search, a service available for free to billions of users.

And yet, still, to these days, we’re not sure how the algorithm behind Google search works, and this is mostly and tightly controlled by the company, which built an incredible competitive moat on top of it.

Open vs. closed innovation is often a philosophical choice that stands on the shoulders of the founders trying to build something valuable in the world.

It is important to highlight that organizations often rely on both open and closed.

Going back to the example of Google, the company doesn’t share nor let developers build on top of its free search engine.

However, Google Chrome, the browser owned by the company, works as a marketplace where developers can build on top of it.

Thus, while Google sets the policy and core rules of the chrome marketplace, a part of it is open to developers who can build valuable tools, thus expanding the value of the browser.

Indeed, if Chrome is among the most popular browsers on earth, it is also because it offers valuable applications (extensions) that expand its value.

Key takeaways

Open innovation is a business management model that encourages a business to collaborate and share knowledge with external organizations and people.
Businesses that engage in open innovation understand that they do not have the resources or knowledge to solve every problem they encounter.
Open innovation increases knowledge and lowers innovation costs. However, there can be resultant disputes over intellectual property rights when two or more businesses claim credit for a new product.

Key Highlights

Open Innovation Definition: Open innovation refers to a business approach where innovation is sourced externally, not relying solely on internal resources. This involves sharing knowledge and potentially collaborating with other businesses and individuals to drive innovation.
Origin and Purpose: Open innovation was introduced by Henry Chesbrough to enhance product quality, variety, and speed to market. It acknowledges that no single entity possesses all the answers and aims to harness external ideas and expertise.
Sources of Innovation:
- Intracompany: Innovation within different functions or units of a single company.
- Intercompany: Collaborative innovation between separate companies.
- Consultancy: Seeking input from relevant experts.
- Publicly Open: Gathering insights from the general public.
Advantages:
- Expanded Knowledge Pool: Open innovation taps into distributed knowledge globally.
- Lower Innovation Costs: Access to ideas developed by others reduces upfront costs.
- Increased Credibility: Partnering with established businesses can enhance credibility and market share.
Disadvantages:
- Cost: Open innovation can be expensive for smaller companies, potentially giving away competitive advantages.
- Intellectual Property (IP) Rights: Collaboration may lead to disputes over IP ownership.
Real-World Examples:
- Phillips: Created a research campus for collaborative development with other companies and a university.
- Netflix: Launched the Netflix Prize challenge to improve algorithms for user movie suggestions.
Open Innovation vs. Closed Innovation:
- Open Innovation: Focuses on collaboration and sharing to drive innovation.
- Closed Innovation: Emphasizes proprietary technology and limited sharing.
- Hybrid Approach: Organizations often use both open and closed innovation based on their goals and values.

Case Studies

Case Study	Description	Analysis
Procter & Gamble’s Connect and Develop	Procter & Gamble (P&G) adopted an open innovation approach through its “Connect and Develop” program. P&G collaborates with external partners, including suppliers, universities, and startups, to develop new products and technologies. This strategy allows P&G to tap into a broader range of expertise and resources, accelerating innovation.	P&G’s “Connect and Develop” exemplifies the effectiveness of open innovation in leveraging external knowledge and accelerating product development.
NASA’s Open Innovation Initiatives	NASA has embraced open innovation by engaging the global community in various challenges and competitions. The agency launched the “NASA Tournament Lab” and “Centennial Challenges” to crowdsource solutions to complex space-related problems. By involving individuals, teams, and organizations from around the world, NASA harnesses a diverse range of ideas and expertise.	NASA’s open innovation initiatives showcase how organizations in the public sector can benefit from external collaboration to solve complex problems and advance their missions.
LEGO’s LEGO Ideas	LEGO’s “LEGO Ideas” platform invites fans and enthusiasts to submit and vote on new LEGO set ideas. If an idea receives enough support, LEGO considers producing it as an official set, with royalties going to the creator. This approach allows LEGO to co-create products with its passionate fan base, fostering creativity and customer engagement.	LEGO’s “LEGO Ideas” platform illustrates how open innovation can engage customers and enthusiasts in product development while generating new revenue streams.
IBM’s Innovation Jams	IBM conducts “Innovation Jams,” large-scale online brainstorming sessions that involve employees, clients, and partners. These events facilitate idea generation, problem-solving, and the sharing of expertise. IBM has used this approach to address various challenges, from healthcare to sustainability, and foster a culture of innovation within the company.	IBM’s Innovation Jams demonstrate how open innovation can be applied internally to tap into the collective intelligence of a diverse workforce and drive organizational innovation.
General Electric’s Ecoimagination Challenge	General Electric (GE) launched the “Ecoimagination Challenge” to source innovative solutions in clean technology. GE collaborated with entrepreneurs, startups, and innovators to address global environmental challenges. This open innovation initiative resulted in partnerships, investments, and the development of eco-friendly technologies and products.	GE’s Ecoimagination Challenge exemplifies how open innovation can drive sustainability efforts and lead to breakthrough solutions through collaboration with external stakeholders.
Linux and Open Source Software Development	The Linux operating system and open-source software development are iconic examples of open innovation. Thousands of developers worldwide contribute to the development and improvement of Linux and other open-source projects. The collaborative, transparent, and community-driven nature of open source has led to the creation of powerful and reliable software solutions.	Open-source projects like Linux showcase how a global community can collaboratively innovate and develop software, often outperforming proprietary alternatives.
Coca-Cola’s Founders Program	Coca-Cola established the “Founders Program” to collaborate with entrepreneurs and startups in the beverage industry. Through investments and partnerships, Coca-Cola explores new product categories, business models, and distribution channels. This open innovation approach enables the company to stay agile and responsive to changing consumer preferences.	Coca-Cola’s Founders Program demonstrates how open innovation can help established companies stay competitive by embracing external innovation and entrepreneurship.
Ford’s OpenXC	Ford’s “OpenXC” platform encourages developers and innovators to create innovative automotive applications and services. By providing access to vehicle data, Ford empowers external developers to enhance the driving experience and explore new mobility solutions. This open innovation strategy expands the possibilities of in-car technology and connectivity.	Ford’s OpenXC exemplifies how open innovation can foster a vibrant ecosystem of third-party developers and expand the capabilities of products and services.
Innocentive’s Open Innovation Marketplace	Innocentive operates an open innovation marketplace that connects organizations with a network of over 400,000 solvers, including scientists, engineers, and experts from diverse fields. Companies submit challenges to the platform, and solvers compete to provide solutions. This approach enables organizations to access a vast pool of expertise and problem-solving capabilities.	Innocentive’s platform showcases how open innovation marketplaces can efficiently address complex problems by tapping into a global network of experts and problem solvers.
LEGO Mindstorms Community and User-Generated Content	LEGO’s Mindstorms community includes a vast network of robotics enthusiasts and programmers who create and share custom LEGO robot designs, software code, and building instructions. This open innovation ecosystem encourages collaborative learning and continuous improvement of LEGO Mindstorms products.	LEGO’s Mindstorms community demonstrates how open innovation can enhance user experiences by involving enthusiasts in product development and fostering a vibrant community of learners and builders.

Related Framework	Description	When to Apply
Open Innovation	Open Innovation is a paradigm that suggests firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as they look to advance their technology. It promotes collaboration between organizations, sharing of knowledge, and leveraging external expertise for innovation.	When seeking to innovate or develop new products/services, applying Open Innovation can enhance creativity and accelerate progress by tapping into external knowledge and collaborating with external partners, thus supporting breakthrough innovations and improving market competitiveness in business, technology, or research and development (R&D) contexts, ultimately driving growth and promoting long-term success through open and collaborative approaches to innovation.
User Innovation	User Innovation refers to the development of new products, services, or solutions by end-users or consumers themselves rather than by traditional producers or manufacturers. It emphasizes the importance of understanding user needs and involving users in the innovation process.	When designing products/services or solving user problems, leveraging User Innovation can enhance user satisfaction and drive user-centered design by involving end-users in co-creation and feedback loops, thus improving product/service quality and increasing customer loyalty in product development, service design, or customer experience (CX) initiatives, ultimately empowering users to shape their own solutions and drive innovation.
Inbound Open Innovation	Inbound Open Innovation focuses on leveraging external knowledge, ideas, and technologies to enhance internal innovation processes within an organization. It involves activities such as scouting for innovations, collaborating with external partners, and acquiring technologies or intellectual property from outside sources.	When seeking to access external knowledge or enhance internal innovation, adopting Inbound Open Innovation can expand the innovation pipeline and accelerate R&D efforts by leveraging external expertise and partnering with innovation ecosystems, thus supporting technology scouting and enhancing organizational agility in research-intensive industries, high-tech startups, or technology-driven companies, ultimately facilitating breakthrough discoveries and strengthening competitive advantage through open and collaborative approaches to innovation.
Outbound Open Innovation	Outbound Open Innovation involves sharing internal knowledge, technologies, or intellectual property with external partners, such as startups, research institutions, or other organizations. It aims to monetize unused or underutilized assets, drive technology transfer, and foster ecosystem growth.	When seeking to commercialize intellectual property or monetize internal assets, implementing Outbound Open Innovation can generate new revenue streams and expand market reach by partnering with external stakeholders and leveraging external networks, thus supporting technology transfer and stimulating ecosystem growth in knowledge-based industries, venture capital (VC) initiatives, or open innovation ecosystems, ultimately enhancing innovation diffusion and facilitating economic growth through collaborative and mutually beneficial partnerships.
Crowdsourcing	Crowdsourcing involves outsourcing tasks, problems, or projects to a large group of people or an online community, typically through an open call or competition. It harnesses the collective intelligence, creativity, and expertise of a diverse crowd to solve complex problems or generate innovative ideas.	When tackling complex challenges or generating innovative ideas, utilizing Crowdsourcing can tap into collective intelligence and diverse perspectives by engaging a broader audience and facilitating collaborative problem-solving, thus accelerating innovation cycles and fostering creativity in product design, business strategy, or social innovation initiatives, ultimately empowering communities to co-create solutions and drive positive change through inclusive and participatory approaches.
Open Source Innovation	Open Source Innovation involves sharing source code, design blueprints, or technical specifications openly with the public, allowing anyone to access, use, modify, or contribute to the development of a product or technology. It promotes transparency, collaboration, and community-driven innovation.	When developing software, hardware, or technological solutions, adopting Open Source Innovation can accelerate development and foster community engagement by sharing knowledge and encouraging collaboration, thus supporting rapid prototyping and facilitating technology adoption in software development, hardware engineering, or maker communities, ultimately promoting innovation democratization and empowering contributors to co-create and share value through open and collaborative practices.
Lead User Innovation	Lead User Innovation focuses on identifying and collaborating with lead users, who are ahead of the mainstream market in identifying needs and solving problems. It involves engaging with these advanced users to co-create solutions that address emerging trends or unmet needs.	When pioneering new markets or innovating ahead of the curve, leveraging Lead User Innovation can generate breakthrough ideas and drive market differentiation by tapping into early adopters and innovative customers, thus anticipating future trends and capturing market opportunities in product development, marketing strategy, or technology adoption, ultimately positioning organizations as industry leaders and catalyzing disruptive innovation through customer-centric approaches and early market insights.
Open Design	Open Design involves sharing design processes, blueprints, or prototypes openly with the public, allowing for collaborative design iterations, modifications, or adaptations. It encourages participation, feedback, and co-creation in the design process, leading to more inclusive and user-centered designs.	When designing products, services, or user experiences, adopting Open Design can enhance creativity and user engagement by inviting collaboration and enabling customization, thus improving product usability and customer satisfaction in product design, industrial design, or user experience (UX) design initiatives, ultimately empowering users to shape design outcomes and co-create solutions through participatory design processes and open collaboration.
Hackathons	Hackathons are events where individuals, typically programmers, designers, or subject matter experts, collaborate intensively on software projects, prototypes, or solutions within a short timeframe. They foster creativity, innovation, and rapid problem-solving through teamwork and experimentation.	When promoting innovation or solving complex challenges, organizing Hackathons can spark creativity and drive collaboration by bringing together diverse talents and encouraging rapid prototyping, thus stimulating breakthrough innovations and cultivating a culture of experimentation in technology companies, startup ecosystems, or research institutions, ultimately accelerating idea generation and fostering cross-disciplinary collaboration through intensive and focused innovation events.
Participatory Design	Participatory Design involves actively involving end-users or stakeholders in the design process of products, services, or systems. It emphasizes collaboration, co-creation, and user feedback throughout the design lifecycle to ensure solutions meet user needs and preferences effectively.	When designing user-centric solutions or improving product usability, embracing Participatory Design can enhance user satisfaction and product adoption by incorporating user feedback and iterative prototyping, thus improving design outcomes and aligning solutions with user expectations in UX design, product development, or service innovation, ultimately empowering users to shape design decisions and drive meaningful innovation through inclusive design processes and user-centered approaches.