About the Author: Mr. Prashant Kumar, MBA Student, LM Thapar School of Management, Campus Editor, The CEO Insights
Innovation is a key to success and for survival as well. When resources are scarce and/ or constraints are imposed, new ways are to be sought to survive and sustain. Same is the situation at present in the world economy. Financial turmoil has shaken the whole world and all governments. This has direct impact on enterprises, be it large companies or SMEs.
The research paper analyzes the past and reframes the future. It proposes a framework for the enterprises to survive based on open innovation and strategic correlation. The paper introduces open innovation and explains the role of open innovation in endurance of enterprises with briefing about challenges of open innovation. The paper proceeds with what can be achieved by open innovation in recession and explains the necessary actions for open innovation in recession period. The paper touches human side of innovation and based on all these, proposes a framework for open innovation. The paper ends with role of open innovation in small and medium enterprises (SMEs) to show importance of the same for their survival.
The concept of open innovation approach is becoming more and more popular over the years, and several organizations adopt this kind of methodology. Based on the open innovation approach, better results and developments can be achieved through the extension of the innovation processes outside of borders of an organization, and involving partners in the processes: suppliers, customers, business partners, but especially the end users of the new products and services. Organizations realized the importance of opening their innovation processes, but there are several levels of this openness, and using external resources. Innovation process is the development or refinement of new products, services or capabilities of an organization, or application existing solutions in new ways. For the innovation process both internal and external knowledge can be used, or new knowledge can be generated.
2. Role of Open Innovation
The open innovation approach changes some traditional innovation and R&D processes: while innovative solutions are traditionally serious business secrets, this new approach makes the future solutions visible not only for the future users, but also for competitors. In some cases open innovation processes are performed in informal development teams, networks, where only weak central coordination supports the processes (e.g., Linux, Mozilla, and Google web applications). In these cases the goal-oriented approach is more challenging, but there is a bigger possibility for radically new solutions. Mozilla developed a legal and functional model that allows the open source community and Mozilla itself to cooperate in product development (Mendonca and Sutton 2008).
The main advantage of open innovation is the involvement of new thoughts, approaches into the innovation process. The capabilities, competencies and possibilities of internal innovation are limited, while extending the innovation process outside the organization borders, opens (theoretically) unlimited capacities. Through extending the innovation boundaries a wider expert base can be achieved, where the experience from other fields or interdisciplinary areas can be useful for the innovation process. In the case of a biotechnological firm, the company faced with a problem related to DNA sequences. Because they have failed to solve the problem, they opened the problem area for outsider scientist. By surprise the winning solution was presented by a scientist, who is not even working close the problem domain, but he could understand it, and he could reframe an existing technology for the actual problem (Lagace 2006).
As output, a company can directly use the results of the open innovation, or offer indirect products and benefits (e.g., related to Linux), or use the by-results of the innovation process, like customer loyalty, or image (Burghin et al 2008).
The biggest challenge in open innovation is the motivation of participants. However direct compensation (salary, prices, etc.) can be challenging and interesting for several participants, more personal factors have more important role:
· Intellectual challenge of the problem (process of problem solving, achieving success),
· Fame (to show the world of capabilities),
· To be part of the community,
· Fun (fun of problem solving).
Based on these motivation factors, in open innovation approaches organizations should make emphasis on building a suitable virtual environment for cooperation of participants, and offering intangible motivation factors. Participants can even convert these benefits in other relationships, e.g., the fame achieved in an open innovation project or in the open community could result a good paying contract from another company, or can be a good reference even for a company.
Another important challenge is to convince the innovating organization itself about the benefits of open innovation: decision makers usually afraid of presenting the future plans or current developments of the company. Through open innovation it is not hard for competitors to see, or figure out the current development plans for an organization.
3. Innovation for recession
3.1 Achievable benefits
The two key benefits are speed and the ability to capitalize on knowledge and labor regardless of where it resides.
3.1.1 Speed. Open innovation fosters faster exchanges of ideas through innovation action networks and shared development. Open innovation is more agile, better able to deal with uncertainty of markets and enables technology development processes that are more adaptive and efficient. Every company is facing greater demands to respond faster to their market and open innovation can enhance those efforts.
3.1.2 Distributed knowledge and labor. Organizations can more effectively capitalize on skilled labor that is mobile and independent. We are reaching the end of knowledge monopolies based on conventional business models. Globalization trends require increased knowledge to compete in other markets. However, in practice, companies are reducing their internal knowledge bases in an effort to run lean. The best way to meet knowledge and labor limitations is to use open innovation methods.
Open innovation is about more than a small change in R&D. It has the potential to revolutionize business. But at this stage of the revolution, the open innovation process is chaotic. It is advisable to get involved early, fail quickly and often, learn from your mistakes and develop best practices for your company.
3.2 To implement open innovation in an organization
The biggest issue with implementation is that one cannot simply copy another company. Too often a CEO mandates an open innovation initiative because it works for another company and thinks it can simply be duplicated. It just doesn’t work that way. Another issue comes as a result of the lack of company-wide engagement. A go-getter director initiates a program for a department, typically R&D, and the rest of the company is indifferent or even resistant to the changes. Finally, implementation deals with an intangible problem created in a company probably already in shock from too many recent changes to the organization, making it unable to process yet another restructure or corporate culture adjustment.
Every company is unique and must develop an approach to open innovation that fits its needs. Make sure the engagements are the right size. In several cases clients expressed remorse that an open innovation project took two full quarters to implement and then came the realization that the market potential for the project is too small, making the open innovation effort seem trivial.
3.3 To assemble a good open innovation network
Without a network, open innovation is dead. There are examined the different types of connections: solution bounty, internally prequalified, business partners, suppliers, and crowd sourcing in different literatures:
· A Solution Bounty offers a reward for offering a solution to a specific question. On the positive side, it is easy to establish through a third-party, and typically you will find an extremely large number of innovators connected. Some of the disadvantages include the tendency towards innovation against specification which can be too myopic. And transparent problem briefs signal strengths and weaknesses to your competitors.
· Internally Prequalified typically exist in the largest companies. IP issues are handled upfront and the framework supports innovation-against-specification and mission innovation based on the closer engagements between the client and members.
· Business Partners typically are rich in resources compared with typical small innovators, and they are more inclined to think bigger and understand the innovation mission. Some detractors with engaging business partners include the danger that the partner can claim the joint project and you end up boxed out. Also, make sure IP issues are addressed up front.
· Suppliers have inside knowledge of your strategy, and ideally, are more likely to generate disruptive technology. Supplier relationships tend to mitigate IP issues, too. If they value your business, they have a lot to lose if something fails. So normally, suppliers do not squabble over IP so they can maintain client relationships.
· Not all businesses have strong opportunities in Crowd Sourcing. If you are in such a business, crowd sourcing builds customer loyalty and practical knowledge of your value proposition. The primary detractor is the cost associated with managing customer-feedback processes.
3.4 To evaluate open innovation
As with any field that is new, no final answer is available. We can start by examining how open innovation compares to traditional internal methods. Compare the results and time to market of open innovation to previous methods. Ultimately, open innovation should increase profitability compared with only using internal methods.
To assess open innovation by output, we can ask a series of questions. What percentage of sales came from externally licensed technologies? Is this percentage increasing or decreasing compared with 2-3 years ago? What percentage of net income last year came from technology licensed out to other companies? Is this percentage increasing or decreasing compared with 2-3 years ago?
In assessing opening innovation in terms of time to market, we should ask how long it takes for patented ideas created inside the company to be transitioned to the firm’s own products and services. Has this interval changed in the past five years? How? What percentage of internal ideas is offered for external license? How much time elapsed between the patenting of ideas and their external licensing?
4. The human element of open innovation
4.1 The human side: a missing element
It’s easy to assume, especially since much of the open innovation movement focuses on identifying external sources of innovation, that ideas and technologies (or the processes to find them) are the keys to success. But, the key to success in making open innovation happen is in overcoming the significant barriers and perceived risks on the people side of the equation.
According to a recent survey by Strategos, executives cited ‘short term focus’ (63%), ‘lack of time/resources’ (52%), and ‘management incentives not supporting innovation’ (31%) as the biggest barriers to effective innovation. Only 15% cited ‘lack of out-of-the-box ideas’ as a major barrier. Marketing guru Seth Godin sums up the sentiment well, when he says “What’s missing isn’t the ideas — it’s the will to execute them”.
At leading companies like P&G, Nokia and others who are successfully adopting open innovation models, the stories behind the scenes are tales of inspired leadership, aligned incentives, and cultures that support strategic experimentation and reward collaborative results. They have created in their organizations what is called an “Open Innovation Mindset”.
4.2 Five keys to creating an open innovation mindset
Key 1: Broaden your view
We all see the world through the ‘lens’ of our own experiences and pre-conceived viewpoints. For this reason, having the right people doing the looking and having the right mindset becomes critical in where/how you look for innovation and how you filter what you discover. As an example of this ‘filtering’, it’s interesting to look at a study from Dr. Richard Wiseman’s book “Luck Factor”, a book about his study of self-reported ‘lucky’ and ‘unlucky’ people. One of his studies showed that when each of these groups were shown a newspaper and asked to count the number of pictures, on average the self-reported unlucky people spent about two minutes on the exercise while self-reported lucky people spent seconds. The reason? Lucky people tended to spot the message on page two — in big type — “Stop counting: there are 43 photos in this newspaper“. In fact, the unlucky people tended to miss not only this message, but the next one about halfway through — “Stop counting, tell the experimenter you saw this and win $250“.
The lesson: “Unlucky people miss chance opportunities because they’re too busy looking for something else. Lucky people see what is there and not just what they’re looking for“.
Key 2: Create alignment across the innovation ecosystem
Creating alignment within any company is critical to achieving the organization’s goals, and lack of alignment is often cited as a barrier to effective innovation, especially conflicting goals across functional groups. These barriers become even more pronounced in cross-company collaborations. Often in collaborative relationships, at the highest levels it appears that groups are aligned, because they agree on the major goals to be achieved. But if you look deeper, you’ll often see that incentive systems, functional and organizational goals are often in direct conflict with the overall stated goals.
One of the most common mistakes occurs when functional groups across the companies (whether marketing or engineering) negotiate and develop plans with counterparts in other organizations. Because they believe that they ‘speak the same language’, and are often quick to agree on certain aspects of the approach or program, each is much too quick to ‘fill in the blanks’ with assumptions about the other sides intentions and needs. This is a critical point to remember: you are especially susceptible to misunderstandings when the differences are subtle.
Key 3: Adapt to your organization’s tolerance for risk
Authors and consultants James Andrew and Harold Sirkin11 present a framework for alternative approaches to new product and business development, which is valuable as a tool for structuring strategic initiatives that are in line with an organization’s tolerance for risk. The three types of roles include that of Integrator, Orchestrator and Licensor. Integrators manage all steps necessary to generate profit from an idea. Orchestrators carry out some steps and link with partners to carry out the rest (the traditional view of co-development). Licensors license the innovation (or brand) to another company to take it to market. When viewed through the lens of managing risk, these approaches can be adapted to suit an organization’s culture and needs.
Key 4: Put the focus on learning, not results
All of the great skills that larger established companies bring to the task of optimizing current business can become an obstacle to nurturing nascent opportunities within an open innovation environment. In their work on the fallacy of ambidextrous organizations, academics Markides and Geroski state “The skills, mindsets and competencies needed for discovery and innovation are not only different from those needed for mass market optimization; they conflict…” Open innovation initiatives can be thought of as strategic experiments in many ways. In open innovation initiatives, the focus should be on accelerating learning, not solely results. Theory-focused planning and other more flexible planning approaches recognize these differences and put the focus where it belongs: on learning.
Key 5: Transform your culture from the outside in
Individuals and organizations that repeatedly fight their way through to transformational events acquire an ability to champion innovative and potentially risky ideas. It’s not blind optimism; it’s a recognition and calmness about the process of trial and error and a development of informed instinct as to when it’s appropriate to continue with the challenge or move on to the next one. Many of the entrepreneurial companies and individuals that you are likely to partner with in an open-innovation initiative are often just these types of transformational champions – the Michael Boehm’s of the world. Continued exposure to these innovators and these initiatives within a somewhat ‘protected’ and risk-reduced environment will over time create the kind of innovation mindset that otherwise would likely never become reality.
5. Framework for Recession: A Ripe Time for Open Innovation
“Recessions present a good opportunity to collaborate with others on finding, developing and marketing new ideas.”
With the economy softening, it’s tempting for companies to turn off the lights and shut the door on innovation efforts until things pick up. But while this might look like a smart move, the impact—lost momentum, team dispersion, and wasted investments—is less than desirable. It doesn’t have to be this way. One of the best options for recessionary times, and, some would argue, even in expansive times, is to join forces with another entity with complementary innovation goals. Open innovation is about connecting with others to find new ideas and, often, to co-develop and co-market them.
There are many examples of successful open innovation efforts today. Some take the form of pan-industry innovation networks that share in the risks and rewards of their findings. Others are straightforward co-development projects between strategic players.
5.1 Higher levels of brainpower applied. As the old saying goes, “two heads are better than one.” When companies with aligned interests come together, there is a better chance the problem at hand will be more broadly defined and there is less chance of falling prey to group-think. Such broadly defined problems increase the chances for more holistic, breakthrough solutions to emerge.
5.2 Validity. Especially in open-innovation situations that involve a potential provider and a customer, the team has access to field conditions where the essential issues lie. The reference points and shared values that teams derive by working with users on a daily basis helps them zone in on the right problems up front. Solving the right problems is half the battle of innovation, primarily because working on the wrong problems is so costly. Think foregone investment, market share, profits, and the negative career implications associated with failed efforts.
5.3 Quicker to scale. One of the biggest reasons you see entities coming together is to make a given partnership scale up quickly should its efforts be successful. In the Netflix/LG Electronics deal, LG gets ready customers (who it expects will buy millions of its new boxes), while Netflix gets a new media platform that makes it more competitive. This means access to something new to the world that could only have been co-created. Before initiating and/or participating in open innovation efforts, bear in mind a few important things that need to be aligned from the outset:
5.4 Identify partners who share a common vision. Obviously, things can move more quickly if companies already have a relationship, but that is not essential. And sometimes partners can be found in existing networks where you can “meet” and perhaps “date” before getting “married” into a tighter co-development relationship.
5.5 Have a big idea with clear goals. Start with a big idea—after all, one of the advantages of open innovation is that a team of companies can accomplish more than one alone. But the effort also needs clear goals and milestones that partners commit to.
5.6 Plan two team workspaces—one physical, one virtual. It’s important for the team to meet in person at the outset of the effort, any time the team is working to draw conclusions from their separate analyses or when decisions are being made. Other than that, concentrate on using virtual tools to post and share documents and communicate through regularly scheduled calls.
5.7 Manage IP. Managing intellectual property is always the stickiest part of collaborative innovation. The most successful efforts seek to build win-win cultures where both parties benefit in equal measure. Although it should be an expectation to involve lawyers at some point, it is often unproductive to have them driving the early meetings before the parties have had the chance to explore the commercial or investment requirements of the partnership. Instead, it is often more productive to understand each company’s legal culture, its successes and failures in past relationships, and any assets being brought to the table. These things can inform a more casual letter of intent that can guide the early stages until more is known. That document would include the fundamental goals of the united effort, an agreement in principle regarding the resources being brought to the table, and what the expected timetable would be to draw up a more exact picture of the future business relationship. When exploratory activities result in a tangible concept of what the parties will produce and a business model is formulated, then it is time to formalize a business contract.
5.8 Create a new mindset. In many cases, organizational culture can be an obstacle to open innovation. Internal groups often perceive open innovation as a code word for outsourcing, when it’s really an issue of redefining some internal roles and rethinking your innovation organization much more broadly. Success requires a top-level vision and a lot of internal communication as the initiative is rolled out. But, says Venture2’s Docherty, “it’s almost magical to watch the transformation as companies actually become more innovative when they learn to partner with creative companies and entrepreneurs on the outside.” Open innovation is a leap of faith. The job of leadership is to make it a short leap. But given how many recent collaborative efforts have been successful, open innovation should be put on the top of the list of core competencies for the foreseeable future, recessionary times or not.
6. Survival of the Innovative — Doing More with Less
When the economy is down, money is short and cutbacks loom, the first instinct at many organizations is to freeze and do nothing. No new projects, no new ideas — just keep a low profile, cover up and wait for the storm to pass. But while this may be a natural reaction to the crisis, I’ll argue in this paper that it is the wrong reaction, and is actually the riskiest and most dangerous option for companies today. The reason should be no news to anyone reading this paper:
The state of enterprise, for example, IT hasn’t changed — demand for computing services within the organization continues to increase, and the existing infrastructure, often based on the N-Tier distributed computing model, is still as cumbersome, inefficient and difficult to scale. Yesterday you could still solve things by throwing money at the problem. But today there’s no budget for expensive machines, complex integrations or armies of consultants. The only way to deliver the goods, and prove the true value of IT within the enterprise, is to do things differently. Doing something — something innovative — is key to IT’s very survival in these tough times and is true for any company in any sector.
6.1 Innovation that Saves Money
We often think of innovative technology as something that goes beyond the ordinary that allows you to make things bigger, better, and faster. But in fact, one of the main drivers for innovation is economic pressure. Not having enough money makes you think out of the box, and discover how to do more with less. When budgets are cut, you have two choices: deliver less to the organization, making yourself even more prone to the next round of budget cuts, or think of innovative ways to produce the same level of services — or even better services! — With less resources. But this isn’t an easy task: being more efficient requires you to look into how your current systems are running and re-examine some of your most basic assumptions.
6.2 Time for a Change
It is an interesting irony that sometimes the strongest incentive for a change is “we have no choice”. When survival is at stake, many barriers to innovation fall, and stakeholders rally around new ideas which might save the day. The current crisis might be exactly the time to take a bold technological leap which addresses the glaring inefficiencies in the existing infrastructure. For the architect, a crisis might suddenly provide freedom to perform core architectural changes, which, although badly needed, would previously have been very difficult to achieve. Under today’s market conditions, the regular objections — “let’s not break what’s running”, “let’s not rock the boat”, “it’s not company standard” — are not going to cut it. The name of the game is “survival of the innovative” — those who push forward new ideas that will improve efficiency are most likely to survive, while those who take the “sit and wait” approach take the risk of being left behind.
7. Innovation in SMEs
SMEs play an increasingly important role in innovation and job creation, but are nevertheless left out of the research on open innovation, which has been analyzed mainly within the context of large, technology user firms (Chesbrough, 2003). Many surveys have shown and indicated that open innovation is also becoming increasingly popular among SMEs. This is not a surprising, considering the increasingly important role small and medium sized firms play in innovation. After all, small firms often lack resources to develop and commercialize new product in-house and as a result are more often inclined to collaborate with large firms. In addition, the survey results show that open innovation is not entirely different for services and manufacturing firms as we expected based on the literature. Manufacturing firms are on average more active in the outsourcing of R&D and the out-licensing of IP, a result that is not surprising given the technological commitment of these firms, but they do not differ with service firms on other open innovation activities. It has also been found the significant differences between different SME-sizes which show that there are different open innovation strategies and practices among SMEs.
Several motives have been found in studies for firms to start open innovation practices and barriers that SME managers encounter when they open up their innovation process. Open innovation is mainly motivated by market-related targets: these are the most important driver for firms to engage in venturing, to participate in other firms and to involve user in the innovation process. Most SMEs use a broad set of methods to meet the ever-changing customer demand and to stay competitive. Corporate renewal is second most important driver towards open innovation. In addition, many barriers for open innovation in SMEs are related to corporate organization and culture, no matter which type of open innovation practice is pursued. There is certainly no one unique ways in which SMEs deploy open innovation strategies, but we have no further specifications about these different strategies.
The recession and financial meltdown has provided companies an opportunity to come close to each other and to behave with each other in a way of partners in an industry than competitors. To survive, when the resources are scarce and constraints are increasing, innovation is the only way ahead. Many times, it has been proved that collective efforts have shown more substantial results than individual efforts. So, the time has come when all companies in the economy should join hands with their suitable partners and to support each other in survival against all the odds. The purpose of the research is to communicate a message to all the companies and enterprises in India that world economy is changing its faces and economical focus is shifting to Asia. Since, India is a country having a large number of SMEs who contribute a major percentage in economic development and growth; it is required to understand the role of innovation in their survival. Strategic partnership and collaboration will generate new ways to survival for enterprises; leaving them preparing stronger platform for themselves.