|- MARCEL BOGERS|
Presentation by: Marcel Bogers, Associate Professor of Innovation Management, Mads Clausen Institute, University of Southern Denmark.
Welcome to my lecture on "Managing 'Open' Innovation". Today, I would like to talk to you about the importance of innovation in general and in particular the different sources that innovation can originate from. I also want to discuss some of the different elements that are important when firms want to manage a more open approach to innovation.
So, what is innovation? Innovation can be defined as the development and use or commercialization of new or improved products, services or processes. Innovation, in fact, is a vital importance to many firms because it allows them to offer better and cheaper products to their customers to outperform their competitors on the market.
So, how does innovation come about? Well, you may think that this is very much about a firm, which invests significantly in research and development, or R&D, and then finds a way to produce this product and puts it to marked to commercialize it and profit from it. But is this really how innovation takes place? Let's look at an example that I am sure you all are quite familiar with, namely the World Wide Web. So, the World Wide Web is basically a system that uses hypertext to connect different computers, which are connected to the Internet. So, is this something that came about because some large firm invested a lot in R&D and is now making a lot of money from this. Well, not really. In fact, it was Tim Burners Lee who was working at CERN, which is the European Particle Physics Laboratory in Geneva, who basically invented and made public the World Wide Web in 1991. So, was he after making a lot of money; did he spend a lot in terms of corporate R&D? No, not really. In fact, what he said, it is something he needed in his work. He just wanted to solve a problem, which he had, which was to more efficiently share different documents, which are stored on different computer systems. So, it turns out that actually in many cases users are very important sources of innovation. So, for example, users may come up with new features, such as in the case of the early development of the automobile, when users were the ones that came up with features, such as heating, reclining seats and a trunk, for example. In other cases, users actually develop whole new market niches, such as in the case of the jogging stroller, which is basically invented by users, in this case parents, who wanted to go jogging while taking their children along. Another example is actually mountain bike. The mountain bike is also essentially invented by users who wanted to use the bicycle in a different way than what was possible with the products available at that time. Also in services, such as in mobile banking, users have been shown to be very important sources of innovation. So, what this all means is that in some cases, one or maybe a few users may be the ones that come up with a specific innovation. So, for example, in the case of the heart-lung machine, this was actually invented by John Gibbon, who basically couldn't stand losing patients' lives anymore when he was doing operations as a surgeon. And basically had no other choice than to invent this machine by himself because the manufacturers at that time weren't able or willing to develop this piece of equipment for him. In other cases, users and sometimes other experts joined forces, in a way, in larger groups or communities, such as in open source , like the Linux operating system, in which the users are the ones that develop new products and services.
So, how important is this really? Well, if we look at a recent study in the United Kingdom, they showed that actually more than 6% of the consumers in the UK are involved in some sort of innovative activities. Well, is this a lot, you may wonder? Well, these are actually almost 3 million people that are involved in innovative activities, which I would say is definitely a lot if you compare this to the roughly 22 thousand people working for producers in corporate R&D in consumer products. Of course these consumers are not necessarily full-time inventors but they still spend an estimated amount of about 180,000 pounds on innovative activities. When the study looks also at the total of expenditure of these consumers, it turns out that they spend more than 5 billion pounds on innovative activities, which is more than twice what producers spend in terms of corporate R&D in consumer products.
So, what this all means is that this closed model of innovation is not really quite valid. What firms need to do is open up their firm boundaries, to open up R&D for different external sources of innovative knowledge, such as maybe coming from users. A firm that understands this quite well, in fact, is LEGO. So, LEGO has been quite active in finding ways to collaborate with or get knowledge from outside stakeholders, in many cases their customers. So, look at LEGO Mindstorms, for example. This is basically a product, which is a toolkit that consists of hardware and software that users can use to customize their own product, which empowers them in their activities. But, moreover, it has been shown that, in many cases, users come up with totally different ways of using this LEGO Mindstorms toolkit in ways that even LEGO didn't even imagine. And, by the way, they are actually making a lot of money from this, when people are buying their products. Another example is LEGO Cuusoo. So, this is basically a way for actually anybody to submit a design for a new product to Lego. And if they get enough supporters, Lego will actually produce and commercialize this product. So, this is an interesting way in which LEGO is trying to rely on what is sometimes called the "wisdom of crowds"; so, the facts that large groups of people or the general public may be quite able to provide innovative solutions or solve particular problems.
The point here is that, as sometimes indicated, that firms need to realize that no matter who they are, most smartest people in the world are actually are not working for them. So, they need to open up their R&D boundaries for different sources of innovative knowledge. So, they may look for knowledge coming from customers, as I tried to indicate before. Also from suppliers, universities are also an important source of innovative knowledge, and so are competitors. You might wonder initially weather it actually is a good idea to collaborate with your competitor. But it turns out that in many cases firms are better of starting an alliance with another firm to innovate together and thereby capture a bigger market share. For example, if you look at Philips, they are quite active in open innovation in general, and have a quite active alliance portfolio. I think a good example actually comes from their collaboration going back to the late 1970s already with Sony, where they actually joined forces to together develop what we know as the Compact Disc, which obviously is quite a major product that generated a lot of revenues that these companies were able to share. Later on, and also joined by an increasing amount of other organizations, including other competitors, they also developed products such as the DVD and the Blue Ray Disc.
So, looking at this more generally, we can actually identify various phases in this process from trying to profit from external sources of innovative knowledge. So, I tried to indicate several ways in which firms may actually search for, acquire, filter different types of external knowledge from various sources. They may use collaboration, they may use certain toolkits or platforms, such as in crowd sourcing, for example. But this is only part of the story of course because what is important, once you have obtained this innovative knowledge, is to actually integrate it within your R&D organization. And, ultimately, firms obviously want to make money from this by successfully commercializing these innovations.
One way of integrating external knowledge comes from a case I looked at with a colleague of mine on Danfoss, in which they wanted to develop a new product interface, basically. And it turned out that actually by inviting different stakeholders, both within and outside of the firm, to invite them to participate in the innovation process, this created a much more efficient way of solving problems of prototyping and innovation. What this case also indicated is that, in fact, what firms need to realize, it is not only about opening up their R&D boundaries, but they need to take into account that there are other parts of the firm that may be important in absorbing knowledge from the outside. In fact, when I looked at this in one of my studies, I found that there is some kind of specialization in terms of the type of knowledge that these different functions tent to absorb. So, it turned out that, for product innovation, knowledge coming from universities tends to improve the innovative contribution of R&D, while knowledge coming from suppliers was especially influencing innovation in R&D and production, while marketing was especially influenced by knowledge coming from competitors and customers.
However, in a related study, we also found that there are decreasing returns in such a process. What this means is that, basing ourselves on some recent evidence in this area, we find that up to some point it is beneficial for firms to rely on external knowledge sources. But at some point, this effect goes down and they becomes less innovative. We also found some differences between different types of knowledge and it also differs what kind of part of the firm we are talking about in terms of functional areas, which also indicates that it is important to consider the internal organization when firms want to use external knowledge.
Another element, which is important when we think of trying to integrate external knowledge, is the culture that exists in the organization. So, when some of my students were actually looking at a case of MillionBrains, which is a Danish company, which offers a platform for knowledge sharing and crowdsourcing type of activities, they were actually looking at the case of Arla. They started to use this platform and did so quite successfully. But they were actually very much challenged to use external sources of ideas and knowledge because they needed to have the internal culture of sharing knowledge. Another element of organizational culture, which has been shown in some studies, is the fact that especially the most innovative companies tend to be the ones that suffer from, what has been called, a "not invented here" syndrome, which basically means an attitude towards rejecting ideas that are not developed within the firm. What firms need to realize is that they need to turn this culture around into something, which may be called "proudly found elsewhere". In fact, a company like Procter & Gamble in the United States actually very proudly announces that more than half of their new product and service ideas actually come from outside innovators.
A final step, as I mentioned, in this process of profiting of external sources of knowledge is to successfully commercialize the innovations that are developed in this way. I looked at a collaboration between AkzoNobel and Samsung in which it turned out that they were able to successfully develop a technology, which was the aim in this collaboration; this was about developing a kind of cheaper and more versatile technology for recording compact discs at that time. But what was also striking in this case is that, even though this was a technological success, this was less of a commercial success. So, it really indicates that it is important for firms to think about the costs, the risk and the uncertainty involved in this process. They also need to make sure that their open innovation activities are in line with their general strategy and business model.
So , as I tried to explain, there are different steps in trying to profit from external sources of innovative knowledge. So, first of all, there are different sources of knowledge out there, which may be useful for firms in their own innovation activities. At the same time, they can use different types of techniques and mechanisms to get this knowledge into their firm. And some of these things are becoming increasingly important due to some of the changes in our environment, such as the more general availability of the Internet and information and communication technologies, which really helps mechanisms such as crowdsourcing to be much more effective. But again, this is only part of the story; firms need to make sure they have the capability and the culture to successfully integrate this external knowledge into their own organization. And then, finally, they need to make sure that they manage, in some way, the costs, the risks, the uncertainty. They need to make sure that their general strategy and business model is in line with their open innovation activities. And one thing, which may also be quite striking, is that there is in fact some sort of paradox when firms, when especially, I should say, the very innovative firms want to open up their firm boundaries. Because it is especially the ones that are successful in closed innovation, that may be the ones that are most challenged in opening up for external sources of innovative knowledge. But maybe it is a good thing that we found such a paradox, because, following Niels Bohr, who said that it is a good thing to meet such a paradox, because I think it allows us to find those particular issues that are important for us to further investigate, to get a better understanding of what is important in terms of research and practice of managing open innovation.