When sharing is caring and also profiting: Open innovation

Dr B K Mukhopadhyay

(The author is a Professor of Management and Economics, formerly at IIBM (RBI) Guwahati. He can be contacted at m.bibhas@gmail.com)

Dr. Boidurjo Rick Mukhopadhyay

(The author, international award-winning development and management economist, formerly a Gold Medalist in Economics at Gauhati University)

Historically in the tech sector, the internal R&D [Research and Development] of big firms was a valuable strategic asset, and sometimes that acted as their differentiation factor or what gave them leverage. Most companies such as DuPont, IBM and AT&T could compete by doing the most R&D in their respective industries and any new competitor would have to build up considerable resources to create their own labs to survive in the industry, let alone thrive. However, over the past two decades, we have seen many big companies face significant levels of challenges coming from small Startups.

Firms that are in the innovation business, big or small, do not keep their R&D entirely closed to themselves today. They involve wider stakeholder groups in their process of innovation - including customers, suppliers, Government, and third-party consultants, amongst others. This resultantly led to the rise of 'open innovation' where the scientific findings and innovation process is not restricted strictly within the walls of a company.

What is open innovation?

Research by Chesbrough views open innovation as a process whereby purposive inflows and outflows of knowledge can accelerate internal innovation thereby creating an opportunity to expand the markets for external use of innovation. One of the main reasons for leveraging open innovation is the fact that one company at a particular point in time may not have all the best brains and skills in a given area of expertise required for innovation. Therefore, partnering with other firms that have similar expertise could contribute to larger outcomes in the long run. This has become an effective business strategy in many sectors today, where open innovation is taken up as a deliberate strategic move.

Two rather understudied areas in this topic, however, are first, how open innovation is best measured, and second, how open innovation in an SME compares to one in a multinational company. The process of open innovation can be complex and understanding factors behind how research and innovators partners are selected, funding allocation and how different innovation activities are tied in together systematically, technology sourcing and scouting, and also how building inter-organisational networks are supported by firms. These factors still do not necessarily provide a holistic picture of the open innovation of a firm, they are helpful because they do identify some of the key indicators and useful measurement variables but do not necessarily measure them.

Compared to big firms in innovation business that are typically agile and rely on intelligent systems (industry 4.0 attributes, that is) embracing open innovation practices, SMEs can be a lot different. Typically, if the firm has a flexible structure and simple hierarchy it is a lot easier to initiate the first steps of open innovation. Leadership, intrapreneurial architecture and innovation culture of these firms also matter to a significant extent. When SMEs work with larger firms as a part of an agreement or even joint venture, it is an opportunity to access research and development teams and add end-users in the open innovation process to build their in-house future knowledge base. One of the common challenges when it comes to how open innovation practices differ across small and large firms is that small firms cannot manage various inter-connected open innovations at the same time. This is due to both structural and resource-related factors.

Types of open innovation: Inbound and outbound innovation

The definition by Chesbrough as mentioned earlier in this article is interesting since it distinguishes between the inflow and outflows of open innovation. Inbound OI refers to innovation activities focusing on acquiring external knowledge e.g., in-sourcing (or 'licensing-in'), joint R&D (research and development), 'Merger and Acquisition (M&A), and 'user involvement'. Leveraging this new scientific know-how from partner firms leads to accessing new markets and new process innovation to develop over time. For instance, when innovative firms set their mark in the market by releasing innovative products and services too often, it also aggravates the pressure on the firm to keep up with the innovation speed and frequency. But occasionally, the pipeline of ideas and new output can run dry. In other cases, some pipeline items need to be accelerated only with the push given by bigger players with more resources. This way, the pace of innovation can still be maintained while new and existing markets can be preserved.

On the other hand, outbound open innovation exploits knowledge via different channels. By revealing internal knowledge to other firms or selected stakeholders in the process, innovation works its way towards commercialisation e.g., 'licensing-out', 'spin-off' (the very reason why intrapreneurship is encouraged within firms), and 'open-sourcing'. This works towards accessing new markets, for instance licensing out or a franchisee model can give the external firm the to expand the market operations of the franchisor firm. And every new market brings local knowledge, and could also open up new patterns of growth and target demographics.

Because of these two broad types of open innovation, firms not only have an opportunity to utilize external technology, but they learn newer ways to understand and exploit their internal knowledge in different ways (e.g., licensing or franchising) or developing a new business model (e.g., through a Merger or even a spin-off) or to come up with a completely disruptive technology that would lead to a paradigm shift.

Examples of open innovation

"I know you, you know me" from 'Come Together' by The Beatles.

Samsung is well known for partnering open innovation with start-ups besides biggies in the industry. The inbound and outbound open innovation process of Samsung can be understood by the four strategic moves that they call as four legs of the open innovation activities – a) partnerships – generally different forms of collaboration between companies, including with start-ups. This could lead to product enhancements or adding a niche tech feature for a particular demographic thereby contributing to an increased product life cycle and also new product development in some cases. b) ventures – investments that Samsung makes in start-ups that allow them to access cutting edge technology attending to newer demand of tech users, c) accelerators – besides venture investments, Samsung also provides facilities and labs for the start-ups to work in which also tops up the financial investment that they make in these firms, d) acquisitions – thereby bringing the innovative start-ups into the wider fold of the company's innovation agenda, usually these units function independently.

All these four steps progressively add up to their overall open innovation targets. By these moves, Samsung can benefit from the multifaceted innovation taking place within smaller companies and enhance their products and services subsequently while at the same time benefitting the start-ups. For example, Samsung acquired 'SmartThings' to gain an IoT platform, a strategic part of their future business and an integral part of their tech products, without building a new one from scratch.

Similar examples can be found with Lego and Phillips where they not only involve smaller firms to partner with them or invest in mergers or takeovers but also include customers and employees in the process of open innovation. This strategy of opening up the possibilities of expanding knowledge and creativity base generated by wider stakeholder groups – customers, suppliers, academic, and consultancy firms leads to substantial capital development through knowledge sharing. With such collaborations, firms could access a higher volume and diverse nature of resources which is otherwise difficult to build from the inside only. The management of it is equally important which emphasises the role of innovation managers more than ever. If managed right, open innovation provides a strong base of competitive advantage for firms.

Cut to credits, while the benefits of open innovation are evident above – mainly, reducing cost levels of ongoing innovation and enhanced process improvement via collaboration, mergers, spin-offs, accessing new products and markets, and building the knowledge infrastructure, amongst other pros- equally, there are risks such as conflicts and IP infringement cases, ideological and creative differences amongst partners, heavy micro monitoring of smaller firms by the biggies, poor open innovation due to market and firm-level barriers. Once again, therefore, the role of innovation managers is paramount and firms need to invest in the same (right talent acquisition, provision of necessary and timely training, amongst others) in order to competitively leverage open innovation as a strategy for developing and maintaining competitive advantage in the market.