What Is Open Innovation And Why It Matters In Business

Open innovation describes a situation where a business does not rely on their 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

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, they can apply it to a similarly varied range of 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.


  • 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 who 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.

Key takeaways:

  • Open innovation is a business management model that encourages a business to collaborate and share knowledge with external organizations and people.
  • Businesses who 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.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here