Open Innovation: what it is and how startups and companies connect

 What is Open Innovation:

"Open innovation" literally means "Open innovation". The expression was coined by the US economist Henry W. Chesbrough in the essay "The era of open innovation", published in 2003 in the MIT Sloan Management Review.

Open innovation is a business innovation model that is the polar opposite of the traditional model.

The traditional model, which worked throughout the twentieth century, was based on a vertical process of innovation, all within the company: from the Research and Development sector to the final product.

A closed innovation model, based on self-sufficiency, with large investments in internal R&D and intellectual property to obtain ideas from which to develop products and services to be marketed and distributed in complete autonomy.

In this model, the boundary between the company and the outside world is very rigid. Open Innovation.

Chesbrough has identified the corporate culture principles that made it possible:

• Think that the smartest people in the sector work in the company, and therefore do everything to hire them / keep them inside;

• The profit of R&D to the discovery of the greatest possible number of the best ideas in the sector, to be developed and marketed in-house;

• Control intellectual property so as not to allow competitors to profit from their ideas;

• Associate internal innovation with the competitive advantage of "solo" launch on the market;

• Associate this launch with an automatic return of profit;

• Reinvest the profit obtained in R&D to maintain the acquired advantage.

A model that entered into crisis at the end of the twentieth century, both for the increase in the number and mobility of knowledge workers and for the growing availability of private risk capital, which has helped to finance new companies outside the research and development laboratories traditional.

Today, in the event that the company does not promptly pursue a discovery, the people involved could find a startup and receive funding to develop the product/service from the idea. Conversely, the company can now afford not to reinvest in new ideas but to look outside for technology to market. The Great system of open innovation.

The boundary between the company and the outside world has become “porous”, a possible place of exchange. 

We, therefore, moved to an open, horizontal innovation model, in which the company is called to "open up" to the outside, to build paths with startups, universities, research institutions, other companies, to imagine new possible business models.

In the open innovation model, a company markets external ideas and/or uses external channels to market its ideas. An opening that transversally affects all the company's activities, from asset management to the choice of partners to the (re) configuration of the competitive advantage.

In other words: to evolve and remain competitive or establish itself on the market, a company cannot fail to draw on ideas and channels with "mixed" paths that include tools and skills that are not necessarily present internally. Thanking the open innovation system.

The corporate culture principles that make open innovation possible, identified by Chesbrough, are very different from traditional ones:

1. • Be aware that not all the brightest people in the sector are in-house, therefore a questioning that leads to the search for external collaborations;
2. • Recognize that external R&D can create significant value without “devaluing” internal R&D, which is necessary to reclaim some of that value;
3. • Realize that not all internal research will necessarily lead to profit;
4. • Choose to put the construction of a better business model before the “solo” launch on the market;
5. • Change the perspective on intellectual property, both internal, seen as a source of profit when used by others, and external, seen as a source of investment to advance the business.

Chesbrough noted how open innovation is particularly functional in saving "false negatives", those projects that initially do not seem promising but then turn out to be valuable: in the closed innovation model, the company will be inclined to lose many of these opportunities because perhaps they require combining with external technologies or re-balancing the business beyond ordinary activities, only to discover that abandoned projects had enormous commercial value.

An example is Xerox when it still had the Palo Alto Research Center internally: focused on high-speed copiers and printers, the company did not realize the potential of Ethernet and the graphical GUI developed within it, which were marketed with great success by other companies (the GUI was introduced in both Macintosh and Windows operating systems).

Among the major advantages of the open innovation model is Trivia we reduce the risks of innovation and R&D when already advanced solutions are adopted and a greater ability to adapt the business to the context, thus remaining competitive in the market. Among the disadvantages, is the higher cost of coordination and resource management.

How to do open innovation and how the model connects companies and startups having overcome the NIH - Not Invented Here syndrome, most industries are moving towards open innovation.

At the end of April 2021, the carmaker Toyota announced that it had acquired Level 5, the driverless division of the Lyft transport company. The operation follows the investment in 2020 in the startup "Pony.ai" for the construction of a fleet of robotics, and the partnership with the unicorn scaleup "Aurora", founded in 2017 by former executives of Uber, Tesla, and Google, to develop driverless driving systems.

Procter & Gamble, the American multinational of consumer goods, after the now-famous "Connect + Develop" program that opened internal R&D to the world and from which the idea of the Spin Brush electric toothbrush emerged, has adopted a policy for which if the internal company does not use the idea produced within three years, it will be offered to external companies, even competitors. In eleven years, from 2000 to 2011, the percentage of innovation efforts that met their profit and income targets rose from 15 to 50 percent.

LEGO, the Danish toy manufacturer, has been introducing the Lego Ideas program for years: a platform that stimulates users with challenges and contests of varying difficulty to submit and vote on new possible product models.

However, Chesbrough himself specified that open innovation is not a mandatory destination for all companies: rather, companies are positioned on a continuum between the two poles, "essentially closed / completely open", which can be represented, respectively, by the nuclear reactor industry and from Hollywood.

Chesbrough has differentiated open innovation strategies into three categories: financing, generation, or marketing of innovation.

Financing can be through investors or benefactors: investors focus primarily on developing promising ideas, benefactors in the early stages of discovery. Investors include Venture Capital Firms, Corporate VCs, Business Angels, Private Equity Investors, and Small Business Investment Companies that provide venture capital to small businesses. Benefactors include government entities (e.g. the National Science Foundation and the US government's DARPA) but also private foundations.

Innovation for Chesbrough is generated by four types of organizations that correspond to four types of people: the explorer, the merchant, the architect, and the missionary.

Innovation explorers carry out research on the discovery that originated in corporate R&D: typically, they give rise to spin-offs. Merchants focus on a narrow range of technologies, which are then locked into intellectual property and sold to others. One example is Qualcomm, which produced cell phones and software but now focuses on licensing its Code Division Multiple Access (CDMA) technology, the code division multiple access underlying wireless, and associated chips. Innovation architects develop system architectures, whose pieces are produced by others, innovation missionaries create technologies to serve a cause. Among the most famous examples of products made with the approach of missionaries, is Open Source software, on all Linux.

Finally, marketing takes place thanks to marketers and one-stop centers: the former focus on the study of market contexts to identify which external ideas to bring to the company; the latter takes the best ideas and delivers them to their customers at competitive prices.

An example of a marketer is Pfizer, the world's largest drug research, manufacturing, and marketing company. An example of a one-stop center is IBM Global Services.

The "Digital Innovation" Observatories of the Politician di Milano distinguish two approaches to open innovation by companies: Inbound Open Innovation and Outbound Open Innovation.

Inbound and Outbound are two marketing strategies that correspond to "being found" and "seeking". The first is more common than the second because it is considered less risky.

Inbound Open Innovation stimulates innovation within the company through collaborations with universities and established partners, the creation of internal business incubators or accelerators, and the creation of Corporate Venture Capital. There is no shortage of "Call4Ideas", "Call4Startup", contests, or themed competitions that aim to collect innovative ideas to support or development of Hackathons, or marathons aimed at specialized external developers who create innovative ideas useful for business in a few hours.

Outbound Open Innovation seeks innovation outside the company through joint ventures, product licensing, and Business Model platforms. In the case of a joint venture, the company enters into a collaboration agreement with at least one other company for a joint project, which commits them to share resources; in the case of licensing, the company sells the license of its product/service for a fee so that it can be used with economic benefits; in the case of business model platforms, the company uses them to facilitate interaction with consumers to create customized solutions of value for the business.

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Open Innovation promotes collaboration between startups and businesses: the former can access more capital and technologies, enter the market more easily, and acquire references; the latter can capitalize on the startup's R&D activities, diversify the business, test the product/service more easily before launching on the market.

The Digital Observatories of the Politician di Milano have identified eight types of relationships between companies and startups with a view to open innovation: R&D partnership for the co-creation of products/services; spot supply; long-term supply; commercial partnership; participation of the startup in incubation/acceleration programs within the company; partnership for the co-creation of the business model; participation of the company in the equity of the startup; acquisition of the startup.

Open innovation in Bangladesh

78% of large Bangladeshi companies and 53% of SMEs adopt Open Innovation actions, especially inbound: these are the data that emerged from the research of the Startup Intelligence and Digital Transformation Academy Observatories of the Politician Di Milano presented in December 2020 at the online conference "The Digital Innovation does not go into lockdown: companies can seize the startup effect."

Thanking You

MD. MOSHIUR RAHMAN

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