Achieving Excellence in Open Innovation

Foto: Oleksandr Bondarenko/istock.com Achieving Excellence in Open Innovation Open Innovation is seen as a major lever to increase innovation performance. This article explains why leading firms are opening up their innovation activities, which strategies they pursue, and what makes for excellence in Open Innovation. A proven approach is described which helps pinpoint the decisive leverage points to attain such Open Innovation excellence. By Frank Mattes and Philipp Wagner In most industries, the innovation environment is getting tougher. The forces at work may vary among industries, but when business leaders talk about their main innovation challenges, the list of issues usually includes: increased demands from customers and shareholders, increased competition, increased demands for efficiency, shorter product life cycles, increased complexity of innovation, increased costs of innovation, stricter environmental and safety requirements. From an innovation management perspective, firms have tried to address these challenges with innovation in products, services, customer experience, business models, channels and processes. In order to improve effectiveness and efficiency in defining and realizing these innovations, firms have invested sig Business + Innovation 02 I 2013 Seite 36

nificantly in implementing and fine-tuning innovation management systems [1; 2; 3]. As a consequence, many firms have already developed clearly defined metrics, transparent structures, IT solutions, detailed standard plans for innovations, specified processes for eliminating false positives and portfolio approaches for deciding on the best resource allocation. Old School results often disappoint In practice, however, these classic innovation management systems often yield disappointing results. Many board members complain that the number of innovations is too low, that innovation is mostly of an incremental nature and that a large proportion of innovations are not successful in the marketplace. It is also likely that Old School innovation management is not good enough for tomorrow s business world. Samuel Palmisano, ex-ceo of IBM, remarked recently that: The way you will thrive in [tomorrow s] business environment is by innovating constantly innovating in technologies, innovating in strategies and innovating in business models. At the same time, the nature of innovation has changed. It s no longer individuals toiling in a laboratory, coming up with some great invention. It s not an individual. It s individuals. It s multidisciplinary. It s global. It s collaborative. [1] Open Innovation in the spotlight Eight years ago, Professor Henry Chesbrough observed that leading firms, such as IBM and Procter&Gamble, were radically reshaping their innovation management in the direction that Samuel Palmisano described. In studying these firms, he coined the term Open Innovation (OI) for a paradigm shift under which firms use external ideas as well as internal ideas and internal as well as external paths to market as they look to advance their technology [2]. Chesbrough s definition addresses two generic forms of Open Innovation [2]: inside-out Open Innovation, i.e. firms looking for new sources of revenue by exploiting their intellectual property (IP) and technologies within and outside their core markets; outside-in Open Innovation, i.e. firms actively looking for external know-how to increase their innovation productivity. This external expertise can come either from existing innovation partners or potential new partners. In other words, the innovation funnels in Open Innovation firms have permeable walls, through which intellectual property, knowledge and innovations can easily transfer inwards and outwards. Open Innovation proposes that firms systematically utilize a variety of external parties for the improvement of innovation performance. This reflects the networked business and society of the industrialized world. Why Open Innovation matters There are two big reasons why firms need to embrace OI: Firstly, OI offers significant benefits and if the firm does not reap them, its competitors will. And secondly, the business environment that affects innovation management is fundamentally impacted by six megatrends. Open Innovation: The benefits A firm that has fully embraced OI has significant competitive advantages in terms of innovation agility, performance, effectiveness and exposure to risk. Measurable benefits from OI include: availability of more and different ways of solving scientific and technical problems, reduction of time-to-market, reduction of innovation risk, lower upfront fixed development costs, increased chances of successful radical innovations ( Game Changers ), multiplied innovation resources, fixed internal R&D costs transformed into variable costs, extended supplier base. Open Innovation: The need to innovate how you innovate But embracing OI is not only a lever to increase innovation effectiveness and efficiency. In many industries this is a plain necessity in order to remain in business. Six megatrends are creating new realities for innovation managers: Explosion of knowledge: 80% to 90% of the scientists that have ever lived are alive today. This leads to an explosion of knowledge. For example, statistics from the World Intellectual Property Organization show that the number of patents grew at a compound annual grouth rate (CAGR) of 2.1% over the 20th century, at a CAGR of 2.8% since 1960 and at a CAGR of 3.5% since 1990. Globalization of knowledge: A large number of Asian universities and corporate campuses are ranked among the best globally. This trend will prevail in the future, driven by the huge number of students in Asia being awarded engineering degrees (there are 1.2 million new engineers annually in India and China, compared to 40,000 in Germany) and the willingness to absorb knowledge in Western countries the World Migration Report ranks Asia first for students studying abroad. Business + Innovation 02 I 2013 Seite 37

Shorter product life cycles: In most industries the average lifespan of new products is shorter than the lifespan of the previous product generation. This obviously increases the need for higher innovation performance. New scientific boundaries: New scientific disciplines (e.g. nanotechnology) and the merging of established disciplines (e.g. electronics / material sciences) are creating opportunities and threats. In order to keep up with these changes, firms need to build up expertise and competences in these complementary fields. However, due to Shareholder Value considerations this usually cannot be done by simply increasing the firm s R&D headcount. Convergence of industries: In many cases the boundaries between industries are blurring, driven by converging value propositions and markets. Examples of industry convergence include Food / Pharmaceuticals (e.g. functional food), Telecom / Media (e.g. online music streaming services) and Automobile / Energy (e.g. emobility). From an innovation perspective, industry convergence urges firms to co-innovate with firms from other industries to develop complete solutions. Internet-based social networks: The rise of Web-based social networks (Web sites that enable individuals to build online social relations with others with the same in terests) is a megatrend in our society. For example, Facebook (currently the largest social network) has more than 1 billion members with an average age of 38. Once these digital natives become innovation leaders, they will apply the networked lifestyle to the innovation management approach of their firms, thereby enabling them to increase both their learning and their flexibility in ways that would not be possible within a self-contained hierarchical organization. Do not confuse Open Innovation and Open Source We have taken part in quite a number of discussions where it was stated that OI means giving away precious intellectual property. People taking on this viewpoint confuse OI with the related yet fundamentally different concept of Open Source. Open Source has become famous in the software industry, perhaps most notably with respect to the operating system Linux. Both concepts, OI and Open Source, are based on collaborative innovation. But there are two major differences between them: OI has a business model. In OI, external co-innovators contribute something based on the perspective of receiving something in return (e.g. a supply contract or a funding of a joint development). Open Source has no business model although there may be some business models constructed around Open Source (such as Red Hat Linux). The innovation networks differ fundamentally. In OI, the firm innovates by searching for knowledge outside its walls and hence it owns the problem to be solved. Consequently, all interaction lines lead to the firm. Thus, firms can control the in- and outflow of knowledge and the activities in the network or community they are utilizing. In Open Source, the problem is the central focus so the members of the problem-solving community all connect to each other rather than working through one and for one central hub or firm. Open approaches to innovation: Customer/consumer insights MIT Professor Eric von Hippel found that consumer innovation is a widespread phenomenon in many industries [9]. For example, nearly 3 million UK consumers are already engaged in product or service innovation by sharing their ideas and solutions in online communities. Since there is a large crowd of co-innovators outside the firms walls it is almost a no-brainer to ponder how this huge creative potential could be used for innovation purposes. It can be observed that firms that are operating in Business-to- Consumer markets or supply products that are used (or have the potential to be used) in consumer products are pursuing the following three strategies to pull in more and deeper insights about their customers/consumers into the innovation funnel. Netnography In the Web 2.0 era, consumers are able to exchange their ideas and opinions about products and services at zero cost with literally billions of other people around the world. Interestingly, no matter how specialized your field of interest as a consumer is, there are at least a few hundred people around the world with the exact same interest. These consumer tribes use Web 2.0 and gather in online communities, blogs and social media sites. The consumers opinions, discussions and evaluations make up a rich source of information about problems they face with existing products, usage habits and positive and negative emotions. Researchers coined the term Netnography a combination of the words Internet and ethnography to describe scientific approaches that study the behavior of these consumer tribes. Interestingly, these tribes can be analyzed with the researcher only listening to the conversation without actually influencing it. Additionally, the anonymity of the In Business + Innovation 02 I 2013 Seite 38

ternet creates an environment where consumers freely reveal their opinions about sensitive topics. As community members are not aware that they are being observed, discussions are not influenced by the researcher and are not limited in their breadth or depth by the researcher s questions. The asynchronous online interaction between consumers in a tribe allows the individuals to go beyond obvious, immediate statements and gives them time to reflect on the issues more thoroughly so that more deeply hidden aspects can be discovered. For example, German skin care giant Beiersdorf explored business opportunities in the field of self-tanning using Netnography in more than 400 online communities that can be found on this issue. One interesting insight was the fact that bodybuilders show extreme needs regarding the application of self-tanning products since they need to achieve an immaculate tan for their competitions. This consumer tribe s demand for precise and smooth application could not be met by existing products, so they started to experiment with products such as airbrush pistols used for painting cars. Based on insights like this one, the Netnography yielded a landscape of needs, wishes and concerns that frames potential fields of innovation and provides impulses for the innovation process. Netnography is also effective for industrial firms that search new markets in ingredients for consumer products (such as e.g. food ingredients or chemicals). For example, German Specialty Chemicals giant Evonik explored new markets for hydrogen peroxide and found that some 50 new fields of application are discussed by consumers that had not yet been on the agenda of the Business Development managers. One of these ideas, for example, was integrating hydrogen peroxide into white wall paint. The UV radiation of the sunlight activates a bleaching effect and hence the whiteness of the wall remains fresh and intense for a longer period of time. Fig. 1 Classification of open approaches to innovation (on the technological side) Decreasing degree of awareness 08 28 03 Partner-oriented open approaches to innovation Unknown partners 07 21 17 02 01 27 13 09 10 Known partners 14 18 06 16 20 15 19 11 25 04 12 05 24 26 22 23 Decreasing level of specification Targeted search Open-end search Topic-oriented open approaches to innovation Business + Innovation 02 I 2013 Seite 39

Configuration tools In contrast to the virtual worlds in which some consumers spend their spare time, configuration tools provide a research environment setup that can be used to explicitly determine the product variables which are preferred by consumers. This can be helpful in the very early phase of the innovation funnel when the right directions for ideation (idea generation) and concept development need to be determined and also in a later phase to identify preferred variables, variable combinations and features of the concepts. For example, German car manufacturer Audi invited consumers from Germany, the USA and Japan to co-create the infotainment system for Audi s A3 and A4 models. By asking consumers to make trade-offs due to personal budget restrictions or technical restrictions, Audi was able to identify must-have and nice-to-have features. Innovation contests Innovation contests utilize the knowledge and creativity of consumers to answer innovation tasks broadcasted by an organization, often on a temporary online platform. Consumers very often have ideas sometimes even developed solutions and are willing to freely reveal them in exchange for online social reputation or for the chance to win prize money. Just all too often, they lack the channels to communicate their ideas. Idea contests offer a nice means to acquire consumer input or stimulate consumers to come up with ideas. For example, Deutsche Telekom ran an idea contest on machine-to-machine communication. For Deutsche Telekom and a range of other firms, this is a promising new business field but as of now there are not too many clear ideas on what kinds of services should be offered. Within only six weeks, Deutsche Telekom was able to pull in around 800 ideas from a diverse crowd of externals from a variety of technological backgrounds and from all over the world. innovation partner is already known or not and whether the search for innovation impulses is precise or more openended (figure 1). Since the scope of this article is limited, here are just a few interesting strategies that leading German firms are using to access external technological expertise: German skin care giant Beiersdorf leverages the innovation impulses of its large base of suppliers in a proprietary, Web-based hub-and-spoke innovation network. In a confidential and protected environment, Beiersdorf sends out Requests For Ideas, Requests For Concepts or Requests For Solutions to its network of pre-qualified innovation partners that consists of existing suppliers and of new innovation partners which may become suppliers in the future. Bayer s Pharma division has launched a Web portal in which global scientists can submit proposals for joint research projects within pre-defined search fields. Bayer evaluates the proposals and commits to funding the most interesting project proposals. Moving from open approaches to innovation to true Open Innovation If one does a Google search on the term Open Innovation, one will get some 730 million hits. Almost any firm today claims that they are doing Open Innovation. True, every firm takes up innovation impulses from its customers or its suppliers, cooperates with research institutes or develops its new products and services jointly with other partners. However, there is a fine line between doing Open Innovation and true Open Innovation. This might, at first view, look like a difference too fine and too subtle to mention at all. But depending on how you look at it, it has far-reaching implications for how your firm innovates. Studying leading firms, one finds that there are three major differences in how the firms see and implement Open Innovation. Open approaches to innovation: Technological ideas, concepts, solutions Globally leading firms estimate that depending on the industry there are 50 200 times as many scientific or technological experts outside the firm s walls than inside. Obviously, some of them cannot be won as co-innovation partners since they are working for competitors, but still there is a huge crowd of potential contributors to your firm s innovation management on the R&D side. A study conducted by innovation-3 in 2011 [7] showed that firms use some 20 different strategies for opening up their innovation on the R&D side. These can be arranged in a 2-by-2-matrix, depending on whether the external co Fundamental difference number one: Embedding Today, no firm innovates in a completely closed mode. Every firm has open approaches to innovation on the customer / consumer side or on the technology R&D side of its operations. Leading firms, however, have embedded Open Innovation into their strategy, their organization and their culture. Strategically embedded Open Innovation True Open Innovation is embedded into the innovation strategy [5; 8]. The question is not to be open or not be open, to paraphrase William Shakespeare, for two reasons: Firstly, as stated above, every firm is already innovating openly to a less Business + Innovation 02 I 2013 Seite 40

er or a larger extent and secondly, true Open Innovation is a deliberate choice. A true open innovation strategy starts with taking external impulses to translate megatrends into roadmaps and R&D pipelines, takes a hard and unbiased look at current and future core competences and asks: On a global scale, given that most of the smart people are not working for us, what exactly should we focus on?, thoroughly analyzes technologies, business fields and processes to pinpoint where exactly innovation should be done in a closed mode and where it should be done openly, clarifies, after all fields for open innovation have been defined, which open approaches to innovation (see above) are the most suitable ones and, most of all, is not a one-time effort but a continuous process that is repeated at least once per year. Organizationally embedded Open Innovation In many firms, open approaches to innovation are driven by a group of open, entrepreneurial people. These people have a desire to work with the best and the most brilliant parners and to pull in a lot of external ideas in order to have a multitude of options to choose from. But in most of the firms, openness is not woven into the organizational fabric of the whole firm. A firm that uses true Open Innovation builds on carefully balanced central and de-central organizational structures to make sure that openness in innovation is fully embedded [6; 7]. Typically, the roles of an Open Innovation center include: interconnecting existing networks inside the firm, management of externally facing innovation portals, external Marketing of Open Innovation to win the best coinnovators, search for cross-divisional Game Changers, leading the internal Community Of Excellence, integrating with the decentralised innovation units that are responsible for running the relevant innovation agenda and identifying (open) innovation White Spaces. Furthermore, excellent open innovators adjust their processes for the conduct of Open Innovation. Well-defined processes are required for identifying questions and issues for Open Innovation internally [7; 10]. They are also required for addressing outside parties and communicating with them, for evaluating external innovation impulses and integrating the most suitable ones. Culturally embedded Open Innovation At the end of the day, innovation is a people business and so is Open Innovation. Yet, in many firms an open mindset is not pervasive and can be found only in some isolated Business Units. True Open Innovation starts with an open mindset and an opportunity-based mindset. True Open Innovation is part of the corporate culture and present in all formal and informal cultural traits, e.g. in the metrics that are applied to measure superior performance, in the leadership style, in Fig. 2 Illustrative example of the result of an Innovation Health Check Alignment Strategy and goals Culture Processes and tools Business + Innovation 02 I 2013 Seite 41

talent development processes and in the communication style [4; 8]. Fundamental difference number two: Proactivity Quite a number of firms turn to open approaches to innovation when answers to technological challenges cannot be found inside the firm or when they want to have a large influx of new consumer insights once per year to have some food for innovation thought. There is nothing wrong with this way of seeing openness in innovation. True Open Innovation, however, has a proactive mindset. This proactive mindset manifests itself in the planning processes. Firms that are doing Open Innovation plan their roadmaps and R&D projects, allocate budgets and turn to open approaches to innovation only when R&D projects run into difficulties. On the other hand, true Open Innovation firms start the planning process with an opportunity-based approach. The key question is: How much can we leverage our existing innovation firing power? In the planning process, this wide option space is explored and then turned into roadmaps and R&D projects. As an effect, the innovation volume that can be moved through the funnel is larger than if one sees openness in innovation only as a last resort or a once-per-year exercise. Fundamental difference number three: The rigor in pursuing openness The Usual Suspects is not just the title of a successful 1955 Hollywood movie; it is also how many firms look at the global base of potential co-innovators. Quite often, openness in innovation is conducted within a relatively stable set of trusted external innovation partners. There is nothing wrong with this way of seeing openness in innovation. But no matter how large your firm is, more than 99% of the relevant smart people do not work for it. Consequently, true Open Innovation has the ambition to extend the firm s innovation ecosystem as far as it makes sense. True Open Innovation has the hunt for finding new potential innovation partners in its DNA. To achieve this, the firm communicates proactively its innovation wants and needs (after these have been defined in the strategic context, see above), and uses its innovation partners as hubs for attracting even more innovation partners. Furthermore, it communicates actively on all relevant channels success stories that demonstrate why it is the best destination for all relevant companies that might be interested to join a win/win collaborative innovation. Excellence in Open Innovation: Where are you standing? As stated above, Open Innovation is more than just asking customers/consumers about their ideas every once in a while or working with technological partners at times. Open Innovation is a mandate to actively leverage the innovation potential of a large number of external partners via various methodological approaches for the innovation process. To become excellent in this respect, Open Innovation needs to become a part of the firm s DNA. If one dives deeper into the search for Open Innovation excellence, a large number of questions and issues surface. Many firms are currently feeling the need to pinpoint the leverage points which they need to influence in order to move closer to Open Innovation excellence. In our consulting work we found that that there are four leverage points that generate the biggest push (figure 2): Strategy and goals (e.g., Do we see Open Innovation from a strategic view in a reactive or in a proactive mode? Where should we be open, where not? To which extent do existing goals and key performance indicators support openness in innovation?) Management alignment (e.g., How well are top management and middle management KPIs aligned with respect to Open Innovation? How well is the innovation strategy understood by middle managers? To which extent is the innovation strategy operationalized enough so that it supports decisions at the operative innovation management level?) Processes and tools (e.g., How well are the processes defined that yield the exact questions for external searches for innovation impulses? How well are the processes for integrating external innovation impulses into the existing innovation management defined? Are the existing innovation tools sufficient for success in Open Innovation? Culture and skills (e.g. What are the key cultural barriers that keep us from being truly open? Is the existing leadership style appropriate for success in Open Innovation? To which extent does the innovation staff master the relevant Open Innovation skills?) In order to measure where a particular firm or a particular business unit is standing on its way to true Open Innovation and where the levers for excellence in Open Innovation are, the authors have developed a compact and efficient check. It addresses the four areas described above and provides the desired clarity via a process that includes stakeholder interviews and an online questionnaire. The results of the questionnaire can be sliced and diced by function, region and hierarchy level so that quantitative results can be derived for every organizational unit. Business + Innovation 02 I 2013 Seite 42

Lessons Learned Open Innovation is the sustained and systematic utilization of outside insights, knowledge and technologies for your firm s innovation activities. Open Innovation leads to a wider scope of knowledge search and thus increases the chances of finding relevant, valuable and new knowledge ultimately, it is a big lever for increasing innovation performance. For sustainable success, Open Innovation needs to be embedded into the firm s DNA into its strategy, organization, processes and culture. Every firm today has made some steps towards Open Innovation excellence. In order to get closer to Open Innovation excellence, an Innovation Health Check is a pragmatic and proven tool that helps assess the current state and pinpoint the most relevant areas for improvement. Conclusion Firms have a lot of good reasons for opening up their innovation activities to pull in external insights, knowledge and technologies into their respective innovation funnels. While the potential in doing so and the specific approaches differ from industry to industry, in every industry there are some firms which take up the leading position in Open Innovation. However, working with a large number of firms, the authors see only very few firms that go beyond singular attempts and build sustainable Open Innovation practices that are fully embedded into the firm s DNA. If we define this as Open Innovation excellence, it would be of great value to firms to understand where the decisive leverage points are that would help them make a big jump towards this ideal. In working with firms that are advanced in their quest for Open Innovation excellence, the authors developed a pragmatic and proven tool for assessing the current state and pinpointing the most relevant issues in the quest for Open Innovation excellence. Improvements in these points would help the firm to gain leadership in Open Innovation and ultimately in innovation performance. Links and Literature [1] Business Week (2006): The World s Most Innovative Companies. Bloomberg BusinessWeek Magazine, April 23, 2006. [2] Chesbrough, H.W. (2003a): Open Innovation: The New Imperative for Creating and Profiting from Technology. Boston (MA). [3] Chesbrough, H.W. (2003b): The Era of Open Innovation, in: MIT Sloan Management Review, Vol. 44, No. 3, pp. 35 41. [4] Chesbrough, H.W./Crowther, A.K. (2006): Beyond High Tech: Early Adopters of Open Innovation in Other Industries, in: R&D Management, Vol. 36, No. 3, pp. 229 236. [5] Huston, L./Sakkab, N. (2006): Connect and Develop, in: Harvard Business Review, Vol. 84, No. 3, pp. 58 66. [6] Lichtenthaler, U./Ernst, H. (2006). Attitudes to Externally Organising Knowledge Management Tasks: A Review, Reconsideration and Extension of the NIH Syndrome, in: R&D Management, Vol. 36, No. 4, pp. 367 386. [7] Mattes, F. (2011): How to Implement R&D-Driven Open Innovation; online: http://www.innovationmanagement.se/2011/ 06/22/how-to-implement-open-innovation-within-your-rdfunction/, date: 22.06.2011, download: 28.01.2013. [8] Mattes, F. (2012): Moving from Open Innovation to True Open Innovation; online: http://www.innovationmanagement. se/2012/10/08/moving-from-open-innovation-to-true-openinnovation/, date: 08.10.2012, download: 28.01.2013. [9] von Hippel, E. (1986): Lead Users: A Source of Novel Product Concepts, in: Management Science, Vol. 32, No. 7, pp. 791 805. [10] Witzeman, S./Slowinski, G./Dirkx, R./Gollob, L./Tao, J./Ward, S./Miraglia, S. (2006): Harnessing External Technology for Innovation, in: Research-Technology Management, Vol. 49, No. 3, pp. 19 27. The Authors Frank Mattes founded and manages innovation-3, the leading consulting expert on Open/Collaborative Innovation in Central Europe. Prior to innovation-3, he collected more than 15 years of experience in innovation management in specialized medium-sized consulting companies and in The Boston Consulting Group. E-Mail: frank.mattes@innovation-3.com Philipp Wagner is consultant in the fields of strategy, organizational development and (open) innovation management with HLP Entwicklungspartner. Previously, he was in academic research at the RWTH Aachen University where his work focused on aspects of organizational readiness for open innovation. E-Mail: philipp.wagner@hlp-ep.de Business + Innovation 02 I 2013 Seite 43