How to implement Open Innovation by Frank Mattes

How to make Open Innovation work for your R&D

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Contents PART 1 – INTRODUCTION .......................................................................................................... 3 ABOUT THIS TOOL .................................................................................................................... 3 ABOUT THE AUTHOR ................................................................................................................. 4 W ELCOME TO THE FORUM ........................................................................................................ 4 THE KNOWLEDGE IN BRIEF ........................................................................................................ 4 THE KNOWLEDGE IN PRACTICE .................................................................................................. 5 PART 2 – UNDERSTANDING THE THEORY AND BACKGROUND ....................................................... 6 Open Innovation on the agenda ........................................................................................6 Innovation management is getting harder.................................................................6 ‘Old School’ results often disappoint.........................................................................6 OI in the spotlight .....................................................................................................7 Do not confuse OI and Open Source ........................................................................7 Why OI matters .................................................................................................................8 OI: The benefits........................................................................................................8 Six forces impacting innovation management...........................................................8 PART 3 – METHODOLOGY AND PRACTICE INSIGHTS .................................................................. 10 Where the firm should innovate openly ...........................................................................10 Technology fields ...................................................................................................11 Market segments / Business fields .........................................................................12 Time slices .............................................................................................................12 Value Chain............................................................................................................13 Best practice examples from other firms .........................................................................13 Finding the most relevant OI approaches........................................................................18 Implementing OI..............................................................................................................20 IS YOUR ORGANIZATION READY? ............................................................................................. 22 Is the innovation performance of the firm seen more and more critically? .......................22 Are your firm’s existing OI approaches good enough? ....................................................23 Does your firm have a broad view of OI? ........................................................................23 Are your competitors winning the race to build the best innovation network? ..................23 Are the processes in place to support OI?.......................................................................23 CONCLUDING REMARKS ABOUT THE TOOL ................................................................................ 24 THE MISTAKES I LEARNT FROM ................................................................................................ 24 PART 4 – USING & IMPLEMENTING THE KNOWLEDGE................................................................. 25 SUGGESTED READING ............................................................................................................ 28

PART 1 – INTRODUCTION

ABOUT THIS TOOL Applied Innovation Management™ is a series of tools for innovation management practitioners created in collaboration with experts in the field of innovation management from leading companies, business schools and universities. This tool discusses how a firm can find the best approach to Open Innovation in R&D. It is based on insights from a large number of projects in this space. In particular 20 best-practice approaches from globally leading firms will be showcased to inspire your firm’s R&D to implement Open Innovation. Case evidence shows that transforming a firm’s innovation approach in R&D from a closed to an open one promises significant competitive advantages: Increased agility and effectiveness, lowered risk position and revenue growth through new products. A systematic approach to insource the global expertise will give you measurable benefits in the form of: • • • • •

More choices for solving scientific and technical problems Shorter time-to-market Offloading R&D risk to innovation partners Increased chances for successful breakthrough innovations Extending the firm’s base of external innovators and suppliers

THIS IS WHAT YOU CAN EXPECT FROM THIS TOOL This tool provides you with insights on how leading firms are innovating openly in their R&D and with proprietary methodology to find the best approach for your firm. It will enable you to: • • • • •

get a basic understanding of both the problems and solutions connected to R&Ddriven Open Innovation achieve more constructive and higher quality management team discussion by providing a common ground and a common language in this topic better reflect on the situation of your firm and take action to create an environment that supports R&D-driven Open Innovation prepare for the challenges and avoid repeating the mistakes of others identify the vital steps that need to be considered when designing and implementing Open Innovation in your firm’s R&D

ABOUT THE AUTHOR Frank Mattes has more than 15 years of experience in managing projects and innovation. He has worked for several specialized medium-sized consulting companies and for The Boston Consulting Group. He also worked at C-level for an IT and a professional services firm. Frank founded and runs the innovation catalyst innovation-3. The consultants, experts, specialists and academics in the innovation-3 network are convinced that innovation management is entering a third generation characterized by a paradigm shift towards openness, cross-industry innovation, competition for the best innovation networks, business model innovation and polycentric structures to manage innovation. These areas constitute Frank’s innovation focuses – and are complemented by deep expertise in change management. Frank is the author of several books and a contributing editor to InnovationManagement, the number one online magazine for innovation practitioners. Frank’s website and contact information are at www.innovation-3.com.

WELCOME TO THE FORUM The InnovationManagementForum.com … (standard text) … take part in these discussions.

THE KNOWLEDGE IN BRIEF The term ‘Open Innovation’ was first coined some years ago. It aims at greater R&D agility and performance and reduced risk exposure. Open Innovation is based in the paradigm that opening up of the innovation funnel will enable the firm to absorb external expertise and / or to identify new paths to market for the firm’s Intellectual Property. Leading firms are practising three variants of Open Innovation. The first focuses on the active commercialization of Intellectual Property (IP); the second and third are aimed at absorption of ideas, concepts and solutions from customers and consumers respectively from academia, suppliers and technical experts. This tool focuses on the third variant. It uses the acronym OI to refer to R&D-driven Open Innovation and terms such as ‘open approaches to innovation’ should be understood within this context. OI is a powerful lever for enhancing the firm’s innovativeness since it multiplies the firm’s R&D resources. Procter&Gamble e.g. estimates that there are 2 million global experts in its technology fields – which is more than 200 times as much as the 9,000 people that it has on the payroll of its R&D units. Merck Inc. states that although it is a global leader in its field it only produces 1% of the patents in its area annually In the wake of OI pioneers, more and more firms from a broad range of industries are opening up their approaches to innovation. Judging from case evidence and numerous benchmarking studies most firms are pursuing one or more open approaches to innovation already

â&#x20AC;&#x201C; but only few are operating fully on the Open Innovation mindset and have a wellarchitected, integrated and managed Open Innovation portfolio in place. This tool provides the knowledge required to conduct a critical assessment of the existing open approaches to innovation, to identify new opportunities and to plan for professional implementation.

THE KNOWLEDGE IN PRACTICE Case evidence and benchmarking studies suggest that the following firms and organizations are on a short list of global leaders with respect to OI. Since OI is such a dynamic field, the list of benchmark firms will change â&#x20AC;&#x201C; but as of today, the list below represents a good starting point: -

Akzo Nobel (www.akzonobel.com)

BASF (www.basf-futurebusiness.com/scouting-und-strategie/open-innovation.html)

Beiersdorf (pearlfinder.beiersdorf.com)

Dow Chemical (www.dow.com/innovation/)

DSM (http://www.dsm.com/le/en_US/openinnovation/html/homepage.htm)

Eli Lilly (pd2.lilly.com/pd2Web/)

General Electric (www.ge.com)

GlaxoSmithKline (innovation.gsk.com)

Henkel (www.henkel.com)

Hewlett-Packard (www.hpl.hp.com/open_innovation/)

Hilti (see www.espritsg.ch/files/upload/SBR_Baschrea.pdf)

IBM (www.zurich.ibm.com/)

Kraft Foods (brands.kraftfoods.com/innovatewithkraft/region.aspx)

Mozilla (www.mozilla.org)

Nestle (www.research.nestle.com/OpenInnovations/TechnologySubmission/)

Nokia (research.nokia.com/openinnovation/)

Philips (www.research.philips.com/about/index.html)

Procter & Gamble (www.connectdevelop.com)

Quirky (www.quirky.com)

SCA (www.sca.com)

PART 2 – UNDERSTANDING THE THEORY AND BACKGROUND

Open Innovation on the agenda For many firms, innovation gets harder and harder. At the same time the results of the existing innovation management are disappointing. For these reasons, more and more firms are turning to open approaches to innovation. INNOVATION MANAGEMENT IS GETTING HARDER 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

In an innovation management context, firms have had to cope with innovation in products, services, user experience, business models, channels and processes and in order to realize these firms have invested significantly in implementing and fine-tuning innovation management systems. Today, in many firms one finds 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 in place.

‘OLD SCHOOL’ RESULTS OFTEN DISAPPOINT In practice however, these classic (or ‘Old School’) 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 the large proportion of innovations is not successful in the marketplace. ‘Old School’ innovation management also is likely not good enough for tomorrow’s business world. Samuel Palmisano, CEO of IBM, remarked recently that: ‘The way you will thrive in [tomorrow’s] business environment is by innovating constantly – innovating in technologies, 6

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.’

OI IN THE SPOTLIGHT A few years ago, Professor Henry Chesbrough observed that leading firms, such as IBM and Procter&Gamble, were radically reshaping their innovation management. In studying these firms, he coined the term ‘Open Innovation’ 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’. Chesbrough’s definition addresses two generic forms of Open innovation: -

Inside-out Open Innovation, i.e. firms looking for new sources of revenue by exploiting their IP 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. 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 innovations can easily transfer inwards and outwards, which reflects the networked business and society of the industrialized world. Open approaches to innovation are not new: every firm employs some. The key observations made by Chesbrough related to the intense rigor that the firms applied to searching for new external innovation impulses and to changing the mind-sets of internal innovators to ensure that external ideas were as much appreciated as ideas generated within the firm. In other words the absorption of ideas, concepts and solutions from academia, suppliers and technical experts (in this tool called R&D-driven Open Innovation (OI) can be seen as the rigorous practice of unearthing and leveraging external technological expertise. OI is not about outsourcing R&D; rather it is about in-sourcing the technological expertise of the world.

DO NOT CONFUSE OI AND OPEN SOURCE I have taken part in quite a number of discussions on OI where it was stated that Open Innovation 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 – which results in a hub-and-spoke network structure. 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 central hub.

Why OI matters There are two reasons why firms need to open up their approaches to innovation: OI offers significant benefits – and if the firm does not reap them, its competitors will. Also, innovation management is being changed fundamentally by six megatrends. OI: THE BENEFITS A firm with a fully open approach to innovation has significant competitive advantages in terms of innovation agility, performance, effectiveness and exposure to risk. Measurable benefits from OI include: -

More ways of solving scientific and technical problems

Faster / shorter time-to-market

Reduced 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 firm supplier base.

SIX FORCES IMPACTING INNOVATION MANAGEMENT Opening up the approach to innovation is an opportunity not just for achieving competitive advantage. In many industries this is necessary to remain in business since the nature of innovation management is in a process of changing fundamentally. Six megatrends are creating new realities for innovation managers: -

Explosion of knowledge: According to Derek De Solla Price, 80% to 90% of the scientists that have ever lived are alive today. This leads to an explosion of knowledge. For 8

example, statistics from the World Intellectual Property Organization show that the number of patents annually grew at a 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.

Shorter product life cycles: In most industries the average life-span of new products is shorter than the life-span 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) is creating opportunities and threats. In order to benefit the firm needs to absorb complementary knowledge. Due to shareholder value considerations this usually cannot be done by increasing the firm’s 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 / Pharma, Telecom / Media and Automobile / Energy. 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 interests) is a megatrend in our society. For example, Facebook (currently the largest social network) has more than 600 million members with an average age of 38. When these ‘digital natives’ will become innovation leaders, they will apply the networked lifestyle to the innovation management approach of their firm and enable them to ‘increase both their learning and their flexibility in ways that would not be possible within a self-contained hierarchical organization’, as Julia Liebeskind found in a study on how New Biotechnology Firms innovate.

PART 3 – METHODOLOGY AND PRACTICE INSIGHTS Determining the best OI approaches for your firm can be done through a well-organized thought process: 

Make an inventory of all OI approaches that your firm already is pursuing;



Analyse the fields where OI potentially could add value to your firm;



Look for OI benchmarks in the fields identified in step . Add these approaches to the list made in step ;



Filter out the most suitable approaches by applying four testing questions.

The process can be depicted as shown in Chart 1.

Chart 1: Process for determining the firm’s OI portfolio

Where the firm should innovate openly

Leading firms have a clear view of where they want to innovate openly – and where they prefer to innovate in a closed way. Leading firms are very clear about in which fields they innovate openly and in which fields they deliberately apply a closed innovation model. They identify opportunities for innovateng openly by analysing four dimensions.

TECHNOLOGY FIELDS The firmâ&#x20AC;&#x2122;s product and process innovations are based on a limited number of technology fields. Technology fields usually are differentiated by specific expertise in research, development and production. For example, one of my FMCG clients has identified 150 technology fields in which it operates. These include analytical chemistry, biochemistry, computational modelling, microbiology, perfumes and flavours, packaging, prototyping, polymers, structured substrates and toxicology. To determine in which of these fields innovation should be open one should analyse technology attractiveness and the relative strength of the firm. Good candidates for OI are technology fields that are very attractive but where the firmâ&#x20AC;&#x2122;s relative strength is limited. In practice, the results of this thought process can be visualized in a portfolio diagram. Technology attractiveness (measured e.g. by the breadth and versatility of applications of a specific technology field, the assumed potential for further development and the compatibility with other technologies) is depicted on one axis. The other axis shows the firmâ&#x20AC;&#x2122;s competitive strength in this technology (measured e.g. by a subjective assessment and / or a technology audit and the potential for development of internal know-how and skills) . Every technology field can then be allocated on the portfolio diagram. Additional information such as the resources invested or the number of projects can be added and represented by different sized bubbles.

Chart 2: Finding suitable technology fields for OI

Good candidates for OI are in the upper left quadrant. Innovation in technology fields in the upper right quadrant should be done in closed mode. Decisions on opening up innovation in technology fields in the lower half of the portfolio diagram should be made on a case-by-case basis.

MARKET SEGMENTS / BUSINESS FIELDS New business fields should be considered for open approaches to innovation in order to integrate complementary expertise for shortening the time-to-market. This applies also to existing business fields where success factors are changing rapidly and significantly or to business fields in converging industries (see above, ‘Six forces impacting innovation management’). Finally the firm should look for business fields that are shaped by co-opetition. Consider the Bluetooth Consortium. In 1998, Ericsson IBM Intel, and Nokia formed the Bluetooth consortium. In 1999 3Com, Lucent Technologies, Microsoft and Motorola joined. Most recently, Nintendo has decided to use Bluetooth for communication between the remote controls and the console of its Wii play station. Now the individual firms involved are ‘competing collaborators’, trying to create a dominant design and future business opportunities, but are competing on applications.

TIME SLICES Reaping the the benefits of OI requires the search for appropriate external knowledge, the identification of the most promising proposals and the integration with currently running innovation projects. This takes time – and so it is clear that OI provides only limited value in innovation scenarios with rather short time horizons. OI is a powerful lever for increasing innovation performance if there is time to conduct the activities described above and the potential benefit of an external proposal is large. In practice, OI is used most for innovation topics with a timeframe of 6 to 24 months. Chart 3 shows a methodology for finding suitable time slices that has proved its value in quite a number of projects.

Chart 3: Finding suitable timeslices for OI

VALUE CHAIN Firms implementing OI usually start with core R&D functions. Leading firms will extend their open approaches to the whole value chain, e.g. into Engineering / Production departments (e.g. semiconductor firms) or Sales (e.g. energy firms). Looking at the whole value chain usually generates a large number of potential open approaches to innovation.

Chart 4: Finding suitable slots in the main business processes for OI

Best practice examples from other firms After determining where the firm should innovate openly a list of potential open approaches to innovation in the identified fields should be compiled. This list should contain the OI approaches that the firm already practices and additionally best practices from other firms. Chart 5 depicts 20 different OI approaches from leading firms. These can serve as the basis for discussion. In order to provide a structure they are visualized in a portfolio diagram where the horizontal axis represents the number of external innovators involved and the horizontal axis represents the amount of technical detail provided to the external innovators.

Chart 5: Open approaches to innovation, practiced by leading firms (figures refer to numbers in text below)

01. Supplier innovation workshops Innovation workshops are often used to absorb the innovation potential from suppliers. Leading firms have set up a rigorous, disciplined and formalized scheme for conducting innovation workshops. Example: Henkel conducts one-to-one workshops with its most innovative suppliers several times a year and a one-to-many workshop with less innovative suppliers once per year. 02. Supplier integration Close integration of suppliers in the design and development phases is important to exploit the supplierâ&#x20AC;&#x2122;s expertise for breakthrough features. This approach may be complemented by a decision to invest in a key supplierâ&#x20AC;&#x2122;s production capacities in order to secure future supply. Example: Apple is executing a well-crafted strategy in LCD displays. Apple not only involves the LCD manufacturers intensively in the product development process, it also invests heavily in selected vendors and dedicated display production facilities. This is done to secure Appleâ&#x20AC;&#x2122;s leadership in advanced low-temperature polysilicon display technology (which provides extremely high resolution in small displays). 03. Supplier innovation network Leveraging the innovation impulses from a large base of suppliers can be done in a pro-

prietary, Web-based hub-and-spoke innovation network set up and managed by the firm. In a confidential and protected environment the firm sends out Requests For Ideas, Requests For Concepts or Requests For Solutions to the members of its proprietary innovation n in which existing suppliers as well as new innovation partners which may become suppliers in the future are present. Example: Beiersdorf’s Pearlfinder innovation network. 04. OI intermediaries Open Innovation intermediaries are service providers that help the firm to connect to potential solution providers in the case of technical or scientific challenges. There are different kinds of Open Innovation intermediaries, with some acting as agents (i.e. representing one side of a transaction) while others take the role of brokers or market-makers. Example: Nearly all leading firms (e.g. Siemens, Henkel, Procter&Gamble and BASF) are using OI intermediaries to speed up particular OI challenges. 05. Listening posts / Technology scouts In order to monitor technological trends and to identify start-ups that have the potential to become cutting-edge innovation partners, some firms install organizational units in technological hotspots. Alternatively, specialized consulting companies can be employed to search for new technological knowledge. Examples: BMW has set up a listening post in its Group Technology Office in Tokyo (considered a hub for consumer electronics). BMW pursues a similar approach in product design innovations with ‘Designworks’ set up in Palo Alto and Singapore. Similarly, Deutsche Telekom is using external technology scouts, predominantly in US hotspots on the East and the West Coast. 06. Scientific Advisory Boards To support the firm in spotting and assessing technological trends some firms have set up Scientific Advisory Boards. Usually these are cross-disciplinary groups of high-calibre experts from specific research fields. Example: Henkel has set up a Scientific Advisory Board in its Laundry Case division with members that have expertise in molecule interface chemistry, hygiene, polymers, colloid chemistry, surfactants, fibres, catalysis, biotechnology and dermatology. 07. University co-operation Close co-operation with universities is an important way to absorb the newest research insights. This approach can include contract research done by universities or research institutes. Example: BASF’s CaRLa (Catalysis Research Laboratory) is a BASF / University of Heidelberg alliance dedicated to homogeneous catalysis research. CaRLa is integrated in the university’s ’Industry on Campus‘ initiative and BASF’s global cooperation network. CaRLa is staffed by an international team of six postgraduate scientists from the universi-

ty and six from BASF. 08. Academia / Start-up innovation network Absorbing the most current insights being generated in globally leading universities and research institutes is one of the main ways to improve the firm’s innovation leadership. Attracting the best and brightest minds is not easy and requires a clear value proposition. Example: Eli Lilly’s PD2 initiative provides a no-cost access to phenotypic assay panels for external investigators. Eli Lilly funds and tests the proposals submitted while the external innovator keeps all the Intellectual Property. All that Eli Lilly asks is to have the first right to discuss commercialization opportunities for promising approaches. If there is no agreement within a defined time period the external innovator receives the complete documentation with no strings attached and freedom to use it in whatever way. 09. Joint development Joint development with firms from other industries is an established way to extend the firm’s capabilities. Usually joint development projects are built on the basis of shared rewards and shared risks. Example: Nestlé was able to substantially extend the scope of its innovation pipeline by running an orchestrated series of joint developments with firms such as Barry Callebaut, BASF, Cargill, Cognis, DSM, DuPont, Firmenich, Fonterra, Givaudan, IFF, Kerry, Mane, Symrise, and Tetra Pak. In less than 3 years, these joint developments have contributed to more than USD 200 million worth of new business. 10. Technology In-licensing In-licensing of technology is a well-established business model enabling use of other firms’ technologies without owning them. Example: Bayer MaterialScience recently licensed flexible polymer organic LEDs that can be used in applications such as active packaging and labels, gift cards, electronic toys and games, promotional products or Point-Of-Sale signage. 11. Technology Spin-In Spinning in external technologies is one approach to extend the firm’s technology base and to accelerate the launch of a product with the right performance at the right price. It is interesting to see that leading firms are extending this approach to members in their innovation ecosystem such as suppliers. Example: Siemens’ lighting subsidiary Osram was aiming at creating a consumer LED product in China that could be manufactured for 25 % less than Osram’s current offering. Osram looked at the technology base of five short-listed suppliers, redesigned its product and helped the suppliers to absorb the relevant technologies for manufacturing. 12. VC-based Technology Sourcing Corporate VC is a well-established way to broaden the firm’s technology base by acquir-

ing start-up companies and their cutting-edge technologies. From an innovation management point of view, the key is to leverage the acquired technology. Example: 3M sees its New Venture unit as ‘a way to reignite the innovation virus’ and sets up programmes straight after acquisition to leverage its extended technology base by arranging road shows with its new equity holding to its technical and Marketing and Sales functions. 13. Go-to-market Joint Ventures Go-to-market Joint Ventures extend the firm’s Marketing and Sales capabilities and/or offer an interesting opportunity for targeting non-core markets. Example: General Electric’s GE Hitachi Nuclear Energy maintains a separate go-tomarket identity within GE Power & Water. 14. New value proposition Strategic Alliances Innovative value propositions can be achieved with strategic alliances where the product and service offerings of the partners are complementary and (at least to a reasonable degree) integrated. Example: Acadia, the Strategic Alliance of Cisco, EMC and VMware, aims at winning a significant market share in ‘Cloud Computing’ through the provision of data centre virtualization and private cloud infrastructures. 15. Consortium project Consortia projects are a well-established approach used by firms to pool their individual capabilities in order to come up with complete solutions that perhaps would not have been developed by the parties on their own. In a number of cases the consortium project is incentivized by the possibility of securing public funding. Example: German car maker Audi launched a consortium project with tier-1 supplier Hella and LED manufacturer Osram aimed at advancing LED technology to become suitable for car lights.

16. Cross-industry innovation In cross-industry innovation, already existing solutions from other industries are imitated and retranslated creatively to satisfy the firm’s innovation agenda. These solutions may comprise technologies, patents, speciﬁc knowledge, capabilities, business processes, general principles or even whole business models. Examples: Procter&Gamble was searching for software to simulate the flow of liquid in baby diapers – and found that software package originally written for modelling underground water flows was suitable. When car maker Porsche designed the interior for its latest product generation it was looking for ways to reduce complexity for the driver, in particular by ensuring that in critical situations the driver would know intuitively what to do. Abstracting this requirement, Porsche identified surgeons to have comparable demands on user interaction, and hence co-innovated with Olympus which furnishes oper-

ating theatres in hospitals. 17. Cross-industry and/or cross-science innovation hub Setting up a cross-industry and/or cross-science innovation hub is an interesting way to explore the opportunities in nascent but promising – and at the same time risky – technologies. Example: InnovationLab is a hub owned by BASF, Merck, SAP, Roche, Freudenberg, Heidelberg Printing Machines and the Universities of Heidelberg and Mannheim. It is focused on the emerging industry of Organic Electronics – an industry that is expected to grow by a factor of 300 within the next 20 years. 18. High-tech campus A well-managed concentration of high-end knowledge and facilities will produce considerable on-site interaction among the innovators which will lead to knowledge sharing and mutual inspiration and hence to a significant boost in innovation capacity. Example: DSM’s Chemelot industrial park is one of the largest multi-company communities in Europe. On an area of ca. 8 square kilometres more than 80 companies are coinnovating in intelligent chemical materials. Another example is Philips Semiconductor’s MiPlaza, where an ecosystem of global companies, start-ups, research institutes and entrepreneurs share a joint infrastructure (ranging from basic cafeterias to cutting-edge labs) and form a cradle of innovation and business creation. 19. Competitive innovation race Competitive innovation races are an approach to actively source long-term innovations from pre-selected innovation partners. Within a competitive scenario the best firms receive invitations to enter joint development. Example: German car maker Volkswagen has conducted more than 20 competitive innovation races with more than 100 suppliers through its ‘Forum Innovation’. Its subsidiary Audi follows a similar approach which it calls ‘Audi Value Management’. 20. Supplier in residence An interesting way to co-innovate with suppliers and to absorb their technological expertise is to invite scientists from a particular supplier to work on a particular technical / scientific issue with the firm’s scientists in a lab on the client’s premises. Example: Global skin care leader, Beiersdorf, has ‘Incubation Labs’ and ‘Project houses’ to co-innovate with suppliers at early and later stage phases of the innovation funnel.

Finding the most relevant OI approaches In defining the most relevant open approaches to innovation the firm needs to evaluate the list of potential OI approaches. This list, as described above, should include approaches already being used by the firm and relevant best practice from other firms. 18

Four questions can be used to filter out the most suitable open approaches to innovation out of this list. -

Question

1: Are the approaches aligned to the innovation strategy?

In order to contribute fully to the firm’s innovation performance, the firm’s OI approaches need to be aligned to its innovation strategy. If the firm has a detailed innovation strategy, this is the yardstick to measure the relevance of a particular OI approach. Frequently, the existing innovation strategy is not detailed enough. In this case a rough model will provide sufficient guidance. Abernathy and Clark point out that firms are pursuing four generic innovation strategies. Depending on whether the firm pursues a market leader strategy (i.e. conquering all relevant market niches) and / or a technology leader strategy, its innovation strategy can be positioned in a corresponding portfolio.

Chart 6: Testing question 1 to select the best OI approaches

If the firm is pursuing an ‘Efficiency leader’ strategy, an Academia / Start-up innovation network will not be beneficiary. If the firm is pursuing a ‘Market leader’ strategy it will be of limited value to arrange for VC-based technology in-sourcing; on the other hand in order to open up new market niches systematically building up Go-to-market Joint Ventures and nourishing the firm’s ecosystem of complementary products and service providers may have a large benefit. -

Question

2: Is there a clear focus on the innovation drivers? 19

Within the fields where innovation should be open the firm needs to analyse which players are driving the innovation: Customers, suppliers, academia or business partners. The firm should focus its OI approaches to the ones that target the innovation drivers. For example, a cosmetics company analysed that in key technology fields innovation is driven by suppliers – and consequently is investing in OI approaches that leverage the innovation capacities of suppliers. -

Question

3: Is the firm attractive to the innovation drivers?

The firm should conduct a critical self-assessment of its attractiveness to the innovation drivers identified in the preceding step. For example, OI approaches such as ‘Proprietary innovation network’ or ‘High Tech campus’ may not be a realistic option for medium-sized firms. However, it might be an option to consider joining forces with other firms to increase the firm’s attractiveness and establish sufficient clout. In the German food industry, for instance, several relatively small firms are pooling their OI approaches to set up a shared supplier innovation network. -

Question

4: Is the number of OI approaches rightsized?

Laursen and Salter analysed the sources of information and knowledge for innovation in British manufacturing companies and found that a ‘medium number of innovation partners’ with ‘a significant intensity of collaboration’ adds most value to the firm’s innovation efforts. In other words the firm should be careful not to over-extend its portfolio of OI approaches – unless the approaches are taking place in separate areas of the firm.

Implementing OI Once a suitable mix of OI approaches has been defined the implementation needs to be organized. Based on case evidence the cognitive aspects (the ‘hard facts’ side) can be structured fairly easily. Once the firm has defined its OI portfolio it needs to organize implementation. Usually there are a lot of questions requiring answers during implementation. Preparing for implementation should be done in a solid framework to ensure that all the questions that emerge are collected and transferred in an efficient and effective project management structure. One framework that has proved its value in quite a number of OI implementation projects has ‘four cornerstones’, i.e. four major dimensions that an OI implementation needs to address.

Chart 7: Framework for organizing OI implementation

These four cornerstones are (illustrated by some of the key questions): -

Strategy (Where should innovation be open, where should it be closed? How will OI be integrated into the innovation strategy process?)

Processes / IT (How should the relevant processes be designed? What are the most suitable IT solutions supporting the processes?)

Organisation / Management (Which roles and responsibility areas are required? How should the OI business process be managed?)

Culture / Change

Each OI implementation will involve a specific set of questions â&#x20AC;&#x201C; but case evidence shows that they will always match with one of these cornerstones. In other words, the primary structure (i.e. the sub-project level) for the OI implementation project plan can be structured within the four cornerstones, and the secondary structure (i.e. the work package level) can deal with specific questions. A typical project plan for OI implementation might have 5-8 sub-projects and be structured as in Chart 8:

Chart 8: Generic structure of an OI implementation program

A typical project team taking over responsibility for the â&#x20AC;&#x2DC;Hard Factsâ&#x20AC;&#x2122; (i.e. the first three of these four cornerstones) will include key players from R&D / Innovation management, IT, Legal Affairs, Procurement, Patents and communication experts.

IS YOUR ORGANIZATION READY? Before the firm launches a major initiative to define its OI portfolio and start its implementation it is helpful to check on the readiness of the organization. The questions below may help.

Is the innovation performance of the firm seen more and more critically? In many cases firms started opening up their innovation when shareholders questioned the innovation performance (measured e.g. by new products additional revenue per R&D Euros). In many situations the rising costs of R&D and declining number market successes are seen as indicators that the firmâ&#x20AC;&#x2122;s innovation operating model has reached its limits and a more open approach is needed. You should prepare for these discussions by looking at OI strategies of global benchmarks, of competitors and of firms from similar industries in order to get an understanding of the opportunity space and potentially relevant approaches to OI.

Are your firm’s existing OI approaches good enough? Firms embarking on OI do not usually start from zero – they have usually taken certain steps. Usually there are also some functions that are working on an open model of innovation. It is important to recognize these, but it is also important to analyse whether the firm’s ‘installed base’ is good enough. In order to fully exploit the potential of OI you should take an unbiased look and benchmark your firm. You should also analyse which of the existing open approaches to innovation produces a significant and value-adding inflow and look at the efficiency of the current processes to absorb external knowledge.

Does your firm have a broad view of OI? More and more firms from different industries are increasing the openness of their innovation by implementing OI on a large scale. A number of firms have found that impulses and ideas for OI approaches came from industries with similarities in terms of research structures, innovation funnels, consumers, sales channels and supply chains. A FMCG firm, for example, found that the approach of a Pharma firm to attract academia into its innovation ecosystem had many elements that could be transferred. Within your firm you should install a system for monitoring OI approaches in other industries, (using e.g. a corporate Wiki in the Intranet). It is a good idea to arrange crosscompany / cross-industry workshops on best practice, with companies from other industries and especially where there are no major concerns regarding confidentiality.

Are your aware of your competitors’ initiatives to build the best innovation network? A key competitive advantage for the firms is its innovation power. In the context of OI this means in particular the innovation networks built and managed by the firm. Once leading business magazines portray your firm’s competitors as prime examples of OI it may already be too late since then external innovators may choose these competitors as primary innovation partner. Your firm should actively build innovation networks and use suppliers, academic experts and industry experts as listening posts to find out about competitors’ OI approaches – and those of firms in comparable industries.

Are internal processes in place to support OI? Apart from new processes such as ‘partnering’ which include the identification new innovation partners and managing the firm’s innovation ecosystem, a range of already existing processes needs to be aligned with a more open approach to innovation. These supporting processes include management of portfolios and prioritization of innovation projects through Stage Gates. 23

Your firm should look critically at these processes, exploiting external expertise such as consultants or benchmarking partners from other companies.

CONCLUDING REMARKS ABOUT THE TOOL Companies that want to embrace OI will need to find solutions and implement them. This Applied Innovation Management tool provides proven methods. To define your OI portfolio the list of OI approaches already implemented by other firms are a good starting point. In order to define a particular OI approach for your firm you might want to use the four cornerstones model of Strategy, Processes / IT, Organization / Management and Culture / Change. This should ensure that your OI implementation programme will be targeted, effective and efficient – and hence will have a high chance of success.

THE MISTAKES I LEARNT FROM I learned a lot from two mistakes I made along the way. These are points you should watch for in order to avoid the same mistakes and to speed up implementation. I learned that learning cycles are key to convincing R&D staff. In one of my first OI implementation projects I originally followed a fairly straightforward approach, but noticed then that the organization members did not understand it. In order to make sure that everyone understood the plan I installed learning cycles that enabled larger and larger internal groups to understand and buy into the concept. I learned that a common understanding about OI needs to be established before meaningful discussions on structures and processes can be conducted. For one project, I held a workshop to discuss with the firm’s R&D Top Management whether an ‘OI department’ was needed. I worked under the false assumption that the managers involved had a shared view of OI. In the course of the workshop the discussion turned to fundamental questions such as ‘What should the R&D organization look like in 5 years’ time?’

PART 4 – USING & IMPLEMENTING THE KNOWLEDGE

Judge whether your existing innovation approach is good enough

Generally there are two motivations for opening innovation. The first is dissatisfaction with the results of the existing management of innovation (measured by e.g. the revenue share of new products, the innovation level of the most recent new products, or the time and resources needed to develop and commercialize new products). The second is the strategic decision to shape the way that innovation is conducted in the firm’s industry respectively respond to changes in the innovation environment. QUESTIONS FOR THE READER: How sure are you that the way your firm innovates now will be good enough to sustain your innovation position in 3-5 years’ time?

Be clear about where the firm should innovate openly – and where it should not

OI is a powerful lever for increasing innovation performance in the firm. It improves agility, performance, effectiveness and the risk position. However, there must be a conscious decision about where to innovate openly. In areas where the firm is a global leader it would be unwise to share valuable insights. To determine the areas where OI would increase the firm’s competitive position you should examine the firm’s technology fields, business fields and value chain. QUESTION FOR THE READER: Do you have an unbiased view of the competitive position of your firm in its technology fields, business fields and business processes? Are you clear about where complementary external expertise would be helpful? What time horizon would be most suitable for OI in these areas?

Assess the firm’s existing open approaches to innovation

OI is not new. Every firm has open approaches to innovation. However they may not be good enough. Frequently these approaches are based on old decisions, existing networks and organizational inertia –not unbiased assessment and a green-field approach in the context of the current and expected innovation environment. Your team should make an inventory of the firm’s existing open approaches to innovation. As mentioned in step 2, this inventory should span all technology and business fields and the whole value chain. You may then want to critically assess this inventory and judge the agility, effectiveness and risk position of your firm’s existing open approaches to innovation. QUESTION FOR THE READER: Do you have a complete list of your firm’s existing open approaches to innovation? Are you convinced that every approach is adding enough value with respect to improved agility, effectiveness and risk position?

Be inspired – Look for proven OI approaches and exchange experiences

After your team has compiled the list of the firm’s OI approaches you should look around for proven approaches outside the firm. This will usually involve looking beyond the boundaries of your firm’s industry. Part 3 of this tool mentions 20 best practice examples – these could be a good starting point for your search. It may be helpful to engage in practitioner networks that discuss practical experience. There are a number of these practitioner circles, usually involving OI managers from firms in various industries. Some of these networks require paid membership. The author has set up a free Open Innovation expert circle whose current 30 participants belong to leading firms (e.g. SAP, Lufthansa, Bosch, Beiersdorf) and smaller but highly innovative firms. This expert circle meets several times a year to discuss key factors for success in Open Innovation. QUESTION FOR THE READER: Do you have an open mind about your search for proven open approaches to innovations that may be relevant for your firm? Are you participating in cross-industry expert circles where practical experience is discussed among the practitioners?

Select the most suitable approaches

Once you have set up a list of potential open approaches to innovation you should determine those most appropriate for your firm. To identify the most suitable open approaches to innovation the 4-step process described in this tool might be helpful. The most appropriate approaches can be found by examining the firm’s innovation strategy and the drivers of innovation within the defined areas for Open Innovation and at the fit and number of approaches. QUESTION FOR THE READER: Do you have a clear and strict thought process for identifying the best open approaches to innovation out of the many practised by firms in industries around the world? Do you have an open mind about adapting these approaches to your firm’s situation, e.g. setting up a shared supplier innovation network with other firms?

Plan for a professional implementation

Finally, after establishing your firm’s OI portfolio (i.e. the suitable open approaches to innovation) you should plan for a timely and efficient implementation. Usually implementing a specific open approach to innovation will raise questions about strategy, processes / IT, management and culture / culture change. Similar questions will arise if you implement several approaches simultaneously. In practice it is helpful to allocate the individual issues that emerge from the detailed planning to appropriate areas. This will provide a Work Breakdown Structure that can become the basis for assigning responsibilities and hence will provide guidance during implementation. QUESTION FOR THE READER:

Do you have a detailed plan for implementing your firmâ&#x20AC;&#x2122;s Open Innovation portfolio? Do you have in place a robust Work Breakdown Structure with corresponding responsibilities?

SUGGESTED READING Chesbrough, H.: Open Innovation: The new imperative for creating and profiting from technology; Harvard Business School Press, 2003 This is the ground-breaking book in which Henry Chesbough laid the foundations of the Open Innovation concept. Huston, L. and Sakkab, N. ‘Connect and Develop: Inside Procter & Gamble's New Model for Innovation’, Harvard Business Review, March 2006 This case study gives an in-depth insight into how a leading firm is innovating openly and how it mastered the challenges along the way.

Additional reading Abernathy, W. and Clark, K. ‘The new industrial competition’, Harvard Business Review, September 1981, pp. 68-81 Argyris, C.:’Teaching smart people how to learn’, Harvard Business Review on developing leaders, June 2004 Katz, R. and Allen T. ‘Investigating the Not Invented Here (NIH) Syndrome’, R&D Management 12(1) Kirschbaum, R. ‘Open Innovation in Practice’, Research Technology Management 48(4)page nos Laursen, K. and Salter, A. ‘Open for Innovation’, Strategic Management Journal 27(2) Liebeskind, J. et al. ‘Social Networks, Learning, and Flexibility: Sourcing Scientific Knowledge, New Biotechnology Firms’ Biotechnology Studies, 2004 PDMA (Product Development and Management Association) Primer on Open Innovation; 2006 Schein, E. H. Organizational Culture and Leadership, John Wiley & Sons, 2004 van de Vrande, V. and Vanhaverbeke, W. ‘Choosing Governance Modes for External Technology Sourcing’, R&D Management 36(3) Watzlawick, P. The Language of Change; Basic Books, 1978. Witzeman, S. and Slowinski, G. ‘Harnessing External Technology for Innovation’, Research Technology Management 49(3)