Open Innovation is the Cornerstone of Your Startup’s Success

Many entrepreneurs-to-be believe they are just One Good Idea away from really Making It. This is rarely the case. As we’ve so often seen in the corporate world, the early bird rarely gets the worm. Those with innovative ideas will often do the R&D grunt work… and will then be outdone by a better operator.

One way to beat these odds is to create a company culture of Open Innovation: transparently seeking out and incorporating external ideas while also taking care of the wider ecosystem. It will take care of you in return rather than merely copying what works.

Below is a guide to Open Innovation 101, based on my decade-long experience as a strategy consultant.

Lesson 1: In what context does Open Innovation Exist?

Open Innovation is part of a larger trend within the Open Business world. This concept has a fairly simple definition: create value through connections. If we go a little more in-depth, Henry Chesbrough (prominent Business Wiz) defines the Open mindset as a division of labor to create greater value, leveraging external ideas and using key assets, resources, or positions not only in the company’s own business but also in other company’s businesses. If that sounds a lot like Ricardo’s ideas on modern capitalism, trust your instincts.

“Openness”, in this context, can be divided into four categories:

• Open Innovation: High Openness dependency with a focus on R&D — The openness in R&D becomes so important for value creation & capture that the entire Business Model depends on it
• Fully Open Business Model: High Openness dependency impacting multiple business functions — Openness can occur in several functions; the value creation and capture depends on it
• Open R&D: Low Openness dependency with a focus on R&D — Small initiative or strategic moves, with little dependence on openness
• Open Business Architecture: Low Openness dependency impacting multiple business functions — Openness has shaped new business models but is not a central part of the firm’s long-term value creation plan

Corporate leaders must decide where to position themselves within the above matrix. A few elements can guide them to make the right decision:

1. Business model inconsistencies: When business model elements aren’t aligned, companies may need partners to address gaps. For instance, Buehler, a food processing machine maker, sought partners to enter emerging markets.
2. Need to create and capture new value: Companies like Shire (now part of Takeda), a UK pharmaceutical firm, used partnerships to innovate without relying solely on in-house R&D.
3. Previous collaboration experience: Firms like SAP thrive by involving numerous partners, making openness a natural fit for their business model.
4. Open business model patterns: Industry examples, such as Procter & Gamble’s inspiration from Eli Lilly and IBM, help guide firms toward openness within the same industry (and sometimes across industries).
5. Industry Convergence: When industries blur, as with BMW’s collaboration with Immersion to create the iDrive system, openness may become necessary.

These antecedents help determine how much openness is needed, whether limited to R&D or extended across the company. The process of matching the right business model with antecedents is complex but crucial for adapting to market demands and opportunities. This 2014 paper from St Gallen researchers comes hotly recommended for those wanting a deeper dive (though the examples are quite dated by now).

Lesson 2: Why should I use Open Innovation?

To audition potential talent and/or gather specific ideas

Open Innovation can be used to stimulate the environment rather than for specific questions. In order to gather ideas, 3 steps are necessary :

• Publicly state desire to take in external knowledge
• Define systems to receive and manage external ideas
• Lever ideas that are originally generated externally

To scout for specific answers

Open Innovation can be used to solve specific and clearly defined questions. In order to properly scout for innovation, a company needs to :

• Identify technology and knowledge to pursue
• Search for people, communities, companies, and/or research institutes which have corresponding knowledge
• Scout the relevant partners to take their ideas

To generate additional revenues

Open Innovation can be used to directly realize value from innovation with platforms. To make it work, companies need to :

• Identify innovation to be monetized
• Determine the appropriate platform for monetization
• Implement to realize value

Lesson 3: What are the different approaches to Open Innovation

The modern business landscape increasingly leverages the power of collective intelligence, tapping into the creativity and insights of diverse groups through various innovative methods. Seven innovative methods, to be exact.

• Opinion mining: Looking for ideas and latent needs in what engaged users or opinion leaders are saying in online communities and on blogs
• Idea portals: Soliciting and collecting ideas from either customers or staff through via an open platform
• Mass Customisation: Gaining insights into trends by enabling buyers to customize their purchases using a fixed portfolio of features and options to share their creations
• Crowdcasting: Outsourcing a specific problem or task to an undefined, generally large, group of people in an “open call.” Solvers typically work independently and submit separate competitive solutions
• Crowdsourcing: Delegating key product or service decisions to a set of individuals who are empowered to make collective choices, typically via online voting or prediction markets
• Swarming: Turning the production, maintenance, and enhancement of a product/service over to an open community coordinated emergently via an adhocracy
• IP Marketplaces: Buying, selling, licensing fully-fledged ideas either to accelerate development times or to gain additional value on IP investments

Lesson 4: Which Business Models are most suited to Open Innovation

When an entrepreneur considers creating a business, they tend to think of customers, of products, of funding… but the theory around the business model is often forgotten. It happens organically most times, but there is plenty of value to be garnered by choosing a business model on paper, as it simplifies business decisions down the lines. There are a few that are particularly well-suited to open innovation. If these don’t ring a bell, it may be time to give up on Open Innovation… or go back to business school.

Co-creation / Partnership Business model

1+1 = 3: Two (or more) companies partner in order to create a unique service or product. The consumer benefits from the combined expertise, and both companies gain access to a new market.

Key attributes:

• A significant value difference between both actors partnering to avoid cannibalizing
• Efficient communication around the partnership
• Shared vision
• Compatible strengths
• Defined roles and limitations

Crowdsourcing Business model

Outsourcing to the crowd: information or input related to a task or project is generated by enlisting the services of a large number of people, either paid or unpaid, typically via the Internet. Actors are generally offered a small reward for their contribution.

Key attributes:

• External actors who are able to perform the required task
• Extrinsic or intrinsic rewards available
• Already be an innovative company
• Increased loyalty
• A channel to communicate
• Well-framed requirements
• Clear and transparent assessment process

External consulting / Make More of It Business model

Multiply competencies outside your core business: internally developed expertise, as well as any other high-value assets, are offered to other companies who could benefit from it. This allows the company to produce revenues from unused resources, thus diversifying revenue streams and enhancing the core value proposition.

Key attributes:

• Spare resources
• Recognised capabilities
• Highly specialised/unique core competency
• Fluctuating or seasonal demand
• Potential outside funding

Open business Business model

Leverage collaborative value creation: Open business is an approach to an enterprise that draws on ideas from openness movements like free software, open source, open content, and open tools and standards. The approach places value on transparency, stakeholder inclusion, and accountability. Collaboration with partners in the ecosystem becomes a central source of value creation, thus benefiting all actors.

Key attributes:

• Coherent value chain, attuned to that of future partners
• Cooperation that benefits all stakeholders
• A focal product, service or company that feeds all the others
• Areas in the value creation process where other parties can contribute
• A possible win-win scenario

Open source Business model

Working together to create a free solution: the core of the offer (usually source code) is made freely available to anyone wishing to use it. As such, it can be contributed to (encouraged), or simply used as a customer would. A company can earn revenues by providing complementary services, such as consulting and support. However, it usually benefits more from becoming an industry standard and the image boost that comes with it.

Key attributes:

• Appropriate technology
• A developed sense of community
• Low R&D budget
• Personal motivations
• Free of supplier dependencies
• Set standards for the creation
• Shared risks and resources

Reverse Engineering Business model

Taking lessons from competitors: this pattern refers to the reproduction of another company’s product following a detailed examination of its construction or composition. As this system requires little investment in research or development, the ensuing products can be offered at a lower price than the original one.

Key attributes:

• Unprotected IPs
• Industry transparency
• Consistent patent expiration watch
• Good PR / Legal teams
• Strong recruitment capabilities

Reverse Innovation Business model

Learning from good-enough solutions: Simple and cheap offers developed for emerging markets are imported and sold in developed economies. These offers are often innovative as they were created in a world largely untethered by complex infrastructures.

Key attributes:

• Products that have value across the world
• Untouched key functionalities
• Locally-based R&D
• Reduced costs
• Protected IP
• Efficient repackaging

Social Purchasing / User Communities Business model

Put the community to use: Customers use media to share and purchase products, abandoning entirely the confines of the brand control environment. The company benefits from potential virality and network effects, while customers are able to receive targeted messages tailored to their interests.

Key attributes:

• Technological ability to track customer purchases
• Strong social media presence
• Customer engagement
• Contractualisation
• Products that need to be tried

Lesson 5: What could go wrong? Plenty!

Any entrepreneur trying to add elements of Open Innovation into their company is on the right path to success, that much is true. There are however a few things one needs to be wary of to ensure success.

Focusing too much on IP

Intellectual property is at stake ever time an innovation is undertaken. Still, having IP on top of your mind can create barriers to Open Innovation.

Failing to leverage motivation

With different actors from different companies, the motivations are different. Understanding those motivations and leveraging them is key.

Only half-embracing new partner

In an open business model, new partners are necessary to a greater value creation and capture. Be ready to welcome them.

Startups that fully commit to an open innovation mindset — balancing the protection of intellectual property with openness — are better positioned to harness collective creativity and adapt to market changes.

Ultimately, Open Innovation can turn what may seem like a solitary entrepreneurial journey into a cooperative venture with limitless possibilities.

Good luck out there.

Additional reading

• Why Your Organization Needs an Innovation Ecosystem [Harvard Business Review]
• Why Now Is the Time for “Open Innovation” [Harvard Business Review]