Open Innovation: The strategy for business innovation

We are living in an era where innovation is the driving force of every sector and where the development of ideas becomes a crucial aspect for any entrepreneurial activity.

Nowadays, if a company does not innovate, it is quickly overtaken by its competitors and risks becoming obsolete. In this competitive scenario, innovation plays a central role and becomes the lifeblood for all types of business.

There are two types of innovation: closed innovation and open innovation. While the first one avails itself of an internal research and development system, internally controlling the entire innovation process, the second one envisages the free flow of ideas and technologies from and to the outside.

Open Innovation definition: what is Open Innovation?

The term Open Innovation refers to a new cultural and strategic approach thanks to which companies, in order to grow and create real value on the market, no longer use only internal resources and ideas, but also use external solutions, ideas, tools and skills.

Open innovation often focuses on relationships between start-ups, research institutes, consultants, universities and inventors.

This new approach to innovation involves a careful review of business processes as well as a careful selection of work profiles, preferring people who are open-minded and accepting of change.

The origins of open innovation: the Chesbrough theory

The term Open Innovation was coined in 2003 by the US economist Henry William Chesbrough, (Faculty Director of the Garwood Center for Corporate Innovation), in his essay “The era of open innovation”.

In his essay, Chesbrough gives his definition of open innovation:
Open Innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology.

Simply put, in order to be competitive on the market today, companies must adopt an innovation model that takes into account both internal ideas and resources, but also makes use of tools and skills coming from external sources.

In his book entitled “Open Innovation: The New Imperative for Creating and Profiting from Technology” published in 2003 by Harvard Business School Press, Chesbrough focuses on important thoughts regarding the risks and costs that globalisation was bringing to research and development processes and on how a closed innovation approach put big limits to the technology and innovation leaps of the companies.

Despite the concerns of protecting the intellectual property of inventions and patents, open innovation proves to be the winning solution in such a fast and changing market.
Therefore, the concept of traditional innovation undergoes a radical change, mainly due to the change in economic processes as a result of globalisation.

Advantages of Open Innovation

The main advantages of Open Innovation are:

• great speed of innovation thanks to the use of existing resources.
• reduction of research and development costs, by resorting to solutions or technologies already developed;
• identification of new business opportunities thanks to a more open vision;
• risk reduction in innovation processes and projects;
• relatively short time integration of new technological trends to improve the ecosystem and business processes;

Disadvantages of Open Innovation

However, it is important to emphasise that collaborating with other companies may lead to disadvantages such as:

• Increased costs in relation to agreements with partners;
• Increase in management times and coordination of both internal and external resources;
• Less ability to obtain innovation, since innovation is disclosed and it is no longer possible to have the right to patent it;
• Less incentive to innovate due to longer development times due to collaboration. An alternative to this approach may be the acquisition of innovations that have already been tested and functional, but which require skills and absorption capacity.
   

Inbound Outbound Open Innovation

Inbound Open Innovation and Outbound Open Innovation are the two possible approaches related to an Open Innovation strategy.
Let us analyse them in more detail.

Inbound Open Innovation

This approach calls for adopting external stimuli to create innovation within the company.

In these cases, the companies set up collaborations with the various entities mentioned above and with partners consolidated over time which lead to a reduction in risks and investments, but very often lead to lower results.

Collaboration with entities and partners guarantees the company access to innovation, patents and technologies or test methods that can bring a great competitive advantage.
 
Furthermore, the possibility of organising contests, competitions and various initiatives opens up the possibility of gathering innovative ideas on certain issues which can be useful for the company business.

Less widespread Inbound Open Innovation activities, but which have often led to greater results, involve the use of internal incubators and accelerators as well as the creation of Corporate Venture Capital.

Outbound Open Innovation

This approach is based on the outsourcing of innovations generated by the company in order to undertake innovations outside the company itself.

In this sense, the process reverses the flow of open innovation and everything that is conceived, created and developed within the company is made available outside the company to possible partners who have the need to draw on those resources or technologies.

This approach is less used, because it is considered less safe in protecting the company's intellectual property and resources.

To activate an Outbound Open Innovation process, companies have the following tools available:

• Joint Venture: a real business agreement with which two or more companies undertake to collaborate for the pursuit of a specific objective or for a shared project, sharing risks, resources and gains equally.
• Licensing of own products: transfer by the owner to a third party, so that they can use that particular product or that specific resource, drawing economic benefits from it. A very common example is the production of a time-limited licence.
• Corporate spin-offs: When a business idea is born within an organisation and needs its own structure to come to life and reach its position within the market. In these cases, corporate spin-offs are created, developing new companies with their own internal team, their own business model and an allocated budget.
• Platform business model: the integration of specific platforms that create value by facilitating the exchange between two or more independent groups, commonly between consumers and producers.

How to implement open innovation in your company

Like all changes, even the transformation of companies from a Closed Innovation to an Open Innovation system presents challenges and obstacles that companies have to face.

The biggest obstacle is related to corporate culture and problems related to sharing in order to preserve its intellectual property.

A company that wants to switch to an open innovation system must let go of the corporate culture it followed up to this moment, which was looking at change with scepticism.

Specifically, it is important to avoid the attitude defined by the Anglo-Saxon culture as “not invented here”, that is, an attitude that prevents the use of products, technologies, research and knowledge already existing due to their external origins.

It is also important to accept that innovation can lead to the disappearance of jobs and companies.

A company that wants to make the most of the potential of open innovation must create a flexible organisational structure, made up of open-minded people, and able to interface with both internal and external subjects.

It is necessary to adopt a policy that allows the sharing of developed resources and internal intellectual property, through the development of licences, exchanges or other methods that bring strategic advantages.

Open Innovation in Italy, the best examples

Even Italian companies are putting into practice an open innovation model and to date more than ⅔ of large Italian companies have adopted Open Innovation approaches.

Integration is evolving very quickly and with different degrees of awareness, but it is undeniable that thanks to this approach, the best Italian companies are creating more value and are able to be more competitive on the market.

Mainly large companies, those employing over a thousand employees, are the ones that understand the value of Open Innovation, while small and medium-sized enterprises still struggle to integrate a completely open approach, even if they are moving in this direction a little more every day.

Digital in this sense is bringing great progress and facilitating the development of a better cultural and systematic process.

Open Innovation for the market and companies therefore means a new start, a “restart” based on the contamination of skills and sharing of knowledge. Contamination, driven by new technologies and the digital revolution, will be the key to a new economy, more fluid and capable of achieving objectives by reducing risks and resources.