Open innovation has become popular these days. Chesbrough defines open innovation as “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively” 1. The new imperative for innovating companies is that they can and should use external as well as internal ideas, and both internal and external paths to market, when they seek to maximize returns from their innovation activities.
Open innovation is not only an interesting open in economical stale periods but also in economic downturns like we experience today.
The current economic crisis poses new challenges for Innovation strategies in established companies
The current economic crisis poses new challenges for innovation strategies in established companies. Most companies freeze or reduce their R&D budgets. I provide some arguments how open innovation can be helpful reducing costs of R&D and, more important, how it can create opportunities for growth which are in some cases more attractive than in years of strong economic growth.
The benefits of open innovation during the current economic downturn have only recently been analyzed. Henry Chesbrough and Andrew Garman 2 have recently published a Harvard Business Review article (June) in which they present five different moves how firms can benefit from open innovation in an economic recession where cash availability for innovation projects is strictly limited.
These five moves emphasize the benefits of inside-out open innovation, which refers to processes whereby a company places some of it innovation projects or assets outside its corporate boundaries.
In this way companies can generate extra licensing income
In this way companies can generate extra licensing income, nurture partner relationship, develop and expand ecosystems, earn extra income through licensing deals, and share costs and risks of major innovation projects with external partners.
I strongly recommend reading this HBR. At the same time, I’m convinced that there are some additional benefits when companies apply open innovation in a downturn which has not been mentioned in their article. I explain five additional benefits below.
Before the current financial and economic crisis capital was abundant. Firms could finance their innovation efforts with external money. They could acquire external technology even when their financial position was weak. Since the economic crisis most firms emphasize cost cutting to become cash-positive. Innovation through internal-R&D, external technology acquisition and long term growth are no longer management priorities.
Because many of their competitors are paralyzed by the crisis, cash rich firms can create a competitive advantage when they continue their R&D projects. They can also easily acquire external technology as start-up companies have hard times to find extra financing in the seed or venture capital markets. The current downturn thus opens new strategic options for financially healthy companies!
The current crisis has drastically reduced the availability of seed and VC money. Portfolio firms that are not cash positive have a hard time to survive and face major problems to finance growth. Cooperation with large firms may be relatively more interesting than in times where venture capital money is abundant. Moreover, new ventures have a low valuation: VC-backed start-ups are sometimes valued today at less than 50% compared to similar ventures two years ago. Corporate investors should thus invest in or acquire small companies in a downturn rather than when the market is crowded.
Similarly, the turmoil in the VC-market also opens up possibilities for companies that have never been active as a corporate investor. As investments in high-tech ventures become cheaper they may invest in these small firms in order to acquire new top technologies.
Innovations become more complex and thus also more costly. Huge savings are possible when companies jointly develop new technologies. These savings can of course also be realized in times of economic growth but the pressure to increase R&D efficiency through cooperative agreements is stronger in downturns. We usually think of bilateral forms of R&D collaboration but the most interesting and creative forms of open innovation are large scale, consortia like initiatives 3.
These consortia are advanced organizational forms of open innovation with specific managerial challenges. IP-issues, for instance, have to be resolved when different companies work together. In consortia it is important to understand that
IP-ownership is not always necessary to create a competitive advantage
IP-ownership is not always necessary to create a competitive advantage. On the contrary, ensuring the use of IP and access to IP is essential. In joint R&D initiatives firm may gain even when they do not own the IP and pay royalties (at a reduced rate) for the jointly developed technology
Companies can also reduce R&D costs and speed up the time to market by making use of the services of technology brokers like Innocentive, Ninesigma and many others. These brokers increase the efficiency of the technology market considerably by shifting the balance further in the direction of more external technology acquisition.
Brokers are only one type of open innovation facilitators
Brokers are only one type of open innovation facilitators. There is a rapidly increasing flock of small start-ups that deliver all kind of services which facilitate open innovation activities of companies: examples are technology auctions, IP-exchange, crowd-sourcing, IP bounty hunters, etc… Making use of these “open innovation facilitators” may be even more interesting in a downturn since they provide cost efficient ways to acquire technologies and ideas. Some of these services may also help firms in searching for external uses of IP that stranded in the company.
Successful innovation implies in many cases that firms introduce innovative products timely on the market on a global scale. In an economic downturn firms have not enough resources to finance the introduction of their new products in foreign markets.
Licensing-out the technology to a local producer abroad during an economic recession then makes sense:
First, it enables the innovating firms to introduce their product early on in the product life cycle.
Second, the introduction takes place before competitors have a chance to get a foothold in that market.
Third, royalty income provides money that the firm could not spend otherwise. In this way, the company can develop the next generation technology during the downturn and can be ready when the economic growth accelerates again.
Finally, the licensor may negotiate to make the licensing agreement limited in time. The licensor can decide not to continue the licensing deal and sell directly to foreign markets.
Open Innovation poses quite some management challenges
More and more companies in Europe adopt open innovation practices. Companies such as Philips, Solvay, Nokia, BT, Unilever, Danfoss, Schlumberger and many smaller firms are exploring the possibilities to profit from open innovation. Although its growing popularity, open innovation still poses quite some management challenges. Although managers easily recognize the benefits of open innovation, most of them still struggle with the implementation of open innovation.
Recently, several centers of excellence have been focusing their research on open innovation, consultancy firms consider open innovation as a new growth area for their business, policy makers want to facilitate cooperation between companies and the academic literature about open innovation is rapidly expanding.
These different developments emerged in a scattered way and creating some transparency would be more than welcome. Therefore, I recently established a European Network for Open and Collaborative Innovation under the Exnovate brand name (www.exnovate.org – will be online June 8).
This network brings together companies, academics and public policy makers who are interested and actively involved in open innovation. It intends to offer a growing number of services that are customized for each target group. Large companies with ample experience in open innovation can for instance join the European Open Innovation Forum that will run in parallel with the Berkeley Innovation forum (http://openinnovation.haas.berkeley.edu/BIFpublic.html).
Members of the forum exchange best practices about particular topics on open innovation to improve the effectiveness of their own open innovation strategy. Other initiatives are focusing on SMEs. Next, academics can benefit as they get networked to each other and have a larger exposure to the business community.
Open innovation is also fairly young as teaching topic. There are not that many course outlines available and new teaching cases – especially about European based firms – are needed to position open innovation as an established teaching topic. Some European scholars have been working on a number of cases but there is no structured overview of the available cases.
We want to bring together the different pieces into an online library which is accessible for all interested parties. To stimulate and accelerate the penetration of open innovation as a teaching topic, www.exnovate.org (will be online June 8) offers the visitor a set of course outlines and case studies that focus on open innovation. In this way, I hope to speed up and facilitate the teaching of open innovation at universities, business schools and companies.
The open innovation framework has proven to be a refreshing view on innovation for a growing number of companies. I’m convinced that it still has a lot of untapped potential. I explained how open innovation in a downturn can be helpful in reducing costs of R&D and how it can create opportunities for growth. Yet, many unexplored areas exist: how does open innovation and open business models apply to SMEs or firms in service industries? How to organize and implement open innovation in a company that has been used to work within the closed innovation framework? How should policy makers facilitate open innovation practices?
It’s about time that European managers, policy makers and academics who are interested in the open innovation get organized as an online community to speed up our collective learning and acquire – at least in this field – a leading position in the world.
Wim Vanhaverbeke is professor at the University of Hasselt in the faculty of Business Economics. He teaches Strategy, Innovation Management, Corporate Venturing new business development, and International Management, and published in several international journals.
He is co-editor with Henry Chesbrough and Joel West of Open Innovation: Researching a New Paradigm, a book about the research challenges related to Open Innovation. He is extending research about open innovation and open business models by setting up the European Center for Open and Collaborative Innovation and by doing joint research with different universities around the globe.