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.

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

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.
  • Intercompanyinnovation 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


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.



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.

Read Next: Business Model Innovation, Business Models.

Related Innovation Frameworks

Business Engineering


Business Model Innovation

Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.

Innovation Theory

The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.

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).

Continuous Innovation

That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.

Disruptive Innovation

Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.

Business Competition

In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.

Technological Modeling

Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.

Diffusion of Innovation

Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.

Frugal Innovation

In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.

Constructive Disruption

A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.

Growth Matrix

In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).

Innovation Funnel

An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.

Idea Generation


Design Thinking

Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.

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