Open Innovation: Strategies and Matrix

Open Innovation Overview

• Open innovation is a paradigm where firms use external ideas along with internal ones and internal/external paths to market to advance technology.
• Open innovation happens when firms collaborate with partners throughout the innovation process, spanning technology licensing, R&D alliances, innovation ecosystems/platforms, and innovation alliance networks.
• Inbound open innovation involves firms linking with external entities to get knowledge/competencies for advancing their innovation.
• Outbound open innovation involves firms linking with external entities to commercially exploit internal ideas/technologies.

Open Innovation Matrix

• The open innovation matrix considers the direction of innovation (inbound or outbound) and the nature of the transaction (pecuniary or non-pecuniary).
• Pecuniary inbound innovation is "acquiring."
• Firms scan the outside environment to find free ideas, knowledge, or technologies before starting internal R&D.
• Sourcing examples are getting ideas from customers, using open access literature/data, online voting for market knowledge, crowd-funding projects, and in-licensing open-source technologies.
• Pecuniary outbound innovation is "selling."
• Definition: Firm X captures value from its technology by allowing Z to use X's resources in Z's innovation for money.
• Selling examples are IP sales/out-licensing, such as Nokia making $800 million in 2014 through out-licensing proprietary technologies, and selling specialized knowledge like Chartered Institute of Personnel & Development courses.
• Non-pecuniary inbound innovation is “sourcing.”
• Non-pecuniary outbound innovation is “revealing.”
• Definition: Firms reveal internal resources to other firms for value without immediate financial rewards to help others innovate.
• Revealing examples are Google making Android free for mobile manufacturers, Tesla Motors making technologies free for electric vehicle manufacturers, and Pixar publishing research findings to attract talent.

Advantages and Disadvantages of Open Innovation

• Acquiring involves profiting from other IPs, improving innovation and lowering uncertainty, but the value of intangible assets can be hard to assess.
• Sourcing gives access to resources and lowers R&D costs but may waste time and cause IP disputes.
• Selling leverages R&D investments by charging fees but has transaction costs and the "disclosure paradox" where buyers could steal the idea.
• Revealing increases legitimacy and strengthens the ecosystem but risks competitive disadvantages.

Innovation Management Process

• The innovation management process includes searching, selecting, implementing, and capturing.
• Searching involves using databases, surveying competitors, doing market research, and using brainstorming.
• Selecting involves the use of algorithms, portfolio management matrix, and online voting systems.
• Implementation may involve prototyping, outsourcing, and considering solo or group runs.
• Capture may involve in- or out-licensing, IP sales, sourcing, and technology acquisition.

Types of Collaboration

• Consortia: Typically medium-term, offering expertise, standard, and share funding.
• Disadvantages include financial loss and knowledge leakage of expertise, standards and funding.
• Strategic alliances: Are flexible and lower commitment, giving market access.
• Disadvantages include potential lock-in and knowledge leakage.
• Joint ventures: Are long-term, offering complementary know-how and dedicated management.
• Disadvantages include strategic drift and cultural mismatch.

E-Waste Example

• The e-waste challenge can be approached by searching for solutions via research and benchmarking, selecting smart green bins, and implementing the initiative by outsourcing.
• Capturing value can be achieved through strategic alliances and revealing to other councils for public value.

Open Innovation S Curve

• The open innovation model is described by an S curve.
• The S curve model is Y = f(X) = 0.63-0.31X+0.16X²-0.02X³.
• "Y" and "X" are financial performance and the open innovation score respectively.

Adjustment and Coordination Costs

• Adjustment costs include transferring costs of existing resources, recruiting, training and building internal management systems by purchasing and modifying equipment.
• Digital infrastructure, staff distribution, and travel contribute to the costs found within open innovation structures.
• Adjustment costs per unit decline as the firms enhance operational capability.
• Coordination costs mainly arise from partnership portfolio management.
• Costs regard continuation, identification, initiation, and management of partnership with regard to knowledge transfer, security and processing.
• Coordination costs are least when focusing on business activities and partnerships.
• A greater engagement in activities with open innovation means coordination costs are likely to increase.

Rationale for the S Curve

• The performance, cost and benefits are influenced by the degree of open innovation.

Bottom Line for Open Innovation

• Financial performance and open innovation have an S-shaped relationship, with medium levels of open innovation yielding high returns.
• Closed innovation can be viable and firms aren't always best advised to open up innovation processes.
• A balance between open and closed innovation is crucial for managing exploration and exploitation.
• High dynamism coupled with open innovation leads to poorer financial returns than operating in stable environments in open operations.
• Exponential coordination costs accompany with constant change among partners in innovation.