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.

Related Case Studies

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.

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.

Business Scaling

Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable business model. And as the product is offered at wider and wider market segments, it’s important to align product, business model, and organizational design, to enable wider and wider scale.

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.

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.

Four-Step Innovation Process

A four-step innovation process is a simple tool that businesses can use to drive consistent innovation. The four-step innovation process was created by David Weiss and Claude Legrand as a means of encouraging sustainable innovation within an organization. The process helps businesses solve complex problems with creative ideas instead of relying on low-impact, quick-fix solutions.

History of Innovation

Innovation in the modern sense is about coming up with solutions to defined or not defined problems that can create a new world. Breakthrough innovations might try to solve in a whole new way, well-defined problems. Business innovation might start by finding solutions to well-defined problems by continuously improving on them.

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