Peter Drucker, the legendary management consultant stressed upon the need for innovation and established that a business enterprise has only two basic functions which are marketing and innovation (Drucker, n.d. cited in Swaim, 2010).
Importance of innovation in business
Although businesses in past understood the significance of innovation, until recently it was largely a business function confined within organizational boundaries (Chesbrough, 2003). The firms carried out innovations strictly under a controlled regime so that the innovation could be protected from rivals. Innovations were largely based upon internal resources of the organization including R&D facilities, human resources as well as finance. Focus was laid on managing Intellectual Property (IP) rights in such a way that it becomes almost impossible for others to copy. New ideas were taken to the target markets through organization’s internal marketing channels only. The basic idea behind such a closed innovation approach was that if it would be done in a closed environment using internal resources, the innovator would be the first to develop and market the new idea (Chesbrough, 2003). But this closed approach resulted in many constraints which became obsolete prior to even reaching the target market (Chesbrough, 2003). Thus, businesses started exploring solutions outside organizational boundaries resulting into a more open approach.
Procter & Gamble, Unilever, Glaxo Smithkline and Philips are a few leading firms in their respective industries which have modified their business models to encourage open innovation and have largely benefited by the same (Accenture, 2011; Golightly, 2012).
What is open innovation?
The term ‘open innovation’ was coined by Henry Chesbrough in the year 2003. With open innovation, he laid emphasis on using external resources i.e. external ideas and market paths in addition to internal innovations. While internal resources refer to all the facilities available within an organization. The external resources refer to facilities which are not developed inside the organization. Thus, these are needed to be attained from external sources. Chesbrough enhanced the scope of innovative ideas and recommended firms to look beyond their internal capabilities. Open innovation not only involves sourcing of ideas from firm’s suppliers, competitors, customers and research organizations. But also earning revenues from firm’s unused ideas. Open innovation broadens the sphere of the firm’s knowledge and helps to reap profits from ideas which a firm had developed but never commercialized i.e. inventions still lying unused. The idea of innovation through self-reliance under closed innovation is now being replaced by innovation through connecting and sharing. This has worked especially in the favor of small and medium-sized enterprises (SMEs’) which earlier failed to innovate due to limited resources.
Reasons behind transition from closed to open innovation
The transition from closed to open took place over the years. It is important to understand what compelled firms to come out of the closed regime towards a more open one. The basic reasons include:
- Limited talent pool and increasing employee attrition among firms which compelled them to reduce dependence on internal R&D experts and hire external talent as well.
- Increasing competition among firms and enhancement in consumers’ awareness levels reduced shelf life of good ideas and compelled the firms to market their innovations more quickly than ever before, by making use of external marketing channels along with the internal ones.
- Increasing incidences of such inventions which either could not be utilized internally to innovator’s benefit, thereby creating a need to sell them to outside parties before that invention gets obsolete.
- Increasing innovation investments compelled firms to maximize value of their innovation by making use of both internal as well as external ideas.
- Chesbrough, H. (2003). Open Innovation: The New Imperative for Creating and Profiting from Technology. Boston: Harvard Business School Press.
- Golightly, J. (September, 2012). “Realising the Value of Open Innovation.” Big Innovation Centre. Retrieved from: http://biginnovationcentre.com/Assets/Docs/Reports/Realising_theValue_ofOI_FINAL.pdf
- Open Innovation in Global Networks. (2008). Organization for Economic Co-operation and Development.
- “Open Innovation: What’s Behind the Buzzword?” (November, 2011). ESCP Europe & Accenture.