What is Open Innovation?

12/23/19 | 6 MIN READ

A comprehensive guide to open innovation and how it can benefit your company.

Open innovation occurs when a business looks beyond their internal resources, knowledge, and sources to innovate for services, products, or even business processes.

While internal knowledge and resources are necessary for the innovation process, several external sources should also be considered. These sources include everything from external agencies and published patents to customer feedback. This allows the company to have a more open mindset where innovation isn't defined by strict parameters.

The point of using the open innovation method to innovate your products and services is that it allows you to share and receive information without worrying too much about the information coming from an outside source, which may give you the ability to innovate further than you imagined possible when attempting to do so without outside resources and knowledge. By gaining an increasing amount of information, your decision-making process will be based on known variables, which should help to streamline your path to innovation.

While it's not always possible to share company information with the outside world, there are times when it can be advantageous for you to do so. If you are trying to grow and expand your business, you might want to consider using the open innovation technique.

This article will provide you with a comprehensive guide to open innovation and how it can benefit your company.

Open Innovation vs. Closed Innovation

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To fully understand what open innovation is, it needs to be compared to closed innovation. Even though you might not have heard of closed innovation, it's practiced by the majority of companies that are looking to innovate.

Closed Innovation

In traditional industries, closed innovation is used to create new products and services that the company can sell. The innovation that occurs is brought about by using the company's own resources and knowledge. With closed innovation, all internal ideas are kept within the company to ensure that information isn't shared with external parties.

While closed innovation can be a useful method for creating an innovative product or service, there are some downsides and limits that come with depending on this type of innovation.

The main features of closed innovation include:

  • Company innovations emerge from internal resources
  • All ideas are internal
  • The customer plays a role as a passive recipient of the innovation
  • Venture capital plays a minor role
  • The company focuses on hiring the brightest minds in the industry
  • Innovations related to design, marketing, and development all occur internally
  • The main focus is to reach the market before any other company

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Open Innovation

As for open innovation, it's based on the idea that creative and knowledgeable individuals who aren't in the company could also provide contributions on the development of a new product or service, which can sometimes involve the sharing of intellectual property. The gathering of more information heightens the chance that you as the owner of a company can make a business decision that's as informed as possible.

External collaborators will bring in their own ideas that you can decide to use or set aside as you see fit. While closed innovation and open innovation both have their place in the business world, open innovation has the potential to provide companies with a unique competitive advantage.

The main features of open innovation include:

  • Knowledge is imported and exported to make sure that all innovations are improved and accelerated
  • Ideas are exchanged beyond the borders of the company
  • The customer plays an active role as a co-innovator
  • Many employees are mobile
  • Company makes sure to work with talented individuals inside and outside the company
  • Venture capital is essential with open innovation
  • Innovation can occur from the inside or outside
  • Importance is placed on developing a quality business model as opposed to reaching the market first

open book lot

Types of Open Innovation

There are two basic types of open innovation that your company can use if you believe that this method of innovation is right for you, which include inbound open innovation and outbound open innovation.

It's important to know the different between these two types of open innovation before you begin to use open innovation, which should assist you in avoiding making any mistakes related to changing how your company operates.

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Inbound Open Innovation

Inbound open innovation is focused on acquiring expertise and knowledge from outside of the company while also looking at third parties for information that can help to identify, select, use, and internalize any useful ideas.

An example of inbound open innovation is when a company purchases a patent or other inventions from another company. Many larger businesses like Microsoft and Google license patents that smaller companies that engage in open innovation can purchase. While this form of open innovation can be beneficial to your company, it isn't used as often as outbound open innovation.

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Outbound Open Innovation

Outbound open innovation involves capturing and commercializing ideas that have been internally developed within the company's external environment. This type of open innovation can involve providing a small subset of customers with a new product of yours in order to gain feedback before you officially place the product on the market. This form of open innovation is used on a regular basis. You can also sell your inventions or license some of your technology to a third party.

As touched upon previously, both Microsoft and Google license some of their patents to smaller companies, which is a form of outbound open innovation. Companies like Mountain Dew have also engaged in outbound open innovation in the past. For instance, they revealed a platform called DEWmocracy in 2009, which was designed to provide customers with the ability to create new flavors together. This is a form of customer feedback that proved to be highly successful for Mountain Dew.

By running this platform, they were able to identify which of the newly created flavors were most popular with customers while at the same time marketing the new product before it was even officially created.

Benefits of Open Innovation Companies

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There are many benefits associated with using open innovation for your company. However, this type of innovation isn't always applicable, which is why it should only be used if it matches the goals of your company.

The main benefits of open innovation include:

  • Being able to engage large audiences
  • Being able to engage the right audiences
  • Allowing customers to take part in R&D
  • Gaining goodwill from your customers
  • Improving your brand image
  • Allowing you to find new talent

When you use open innovation, the size of your audience has the potential to be significantly larger than the audience you would have in closed innovation, which can help you avoid having tunnel-vision during product development while also allowing you to create a product or service that you know your customers will be interested in. If you obtain their feedback through open innovation, there's a much lower chance that your product will be a failure.

Having instant feedback throughout the design process should also help you reduce the possibility of developing an unappealing product since your customers will be involved in the R&D process from the beginning. Open innovation can greatly enhance marketing efforts if used properly.

When you allow your customers to co-develop products, you will likely obtain better brand recognition and an improved brand image, which can pay dividends for your public relations now and in the future.

Challenges and Risks of Open Innovation

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Even though open innovation can be very beneficial for the companies that use it properly, there are also some challenges and risks that you should be aware of.

Many companies make the mistake of having unclear goals when using open innovation. While Mountain Dew was initially successful with DEWmocracy, they eventually ran into issues when they provided customers with the ability to name a future beverage without first narrowing the options or setting restrictions. As such, the names that they received were unusable.

You should also make sure that you've found the right audience before you continue using open innovation. If the customers that become co-developers are the wrong audience for your brand, the feedback that they give could be inconsequential. Identifying the right audience will go a long way towards making sure you don't waste your money with a failed business approach.

Some of the additional challenges and risks that come with the open innovation approach include:

  • Lack of commitment by external parties
  • Providing participants with poor rewards
  • Being able to find the platform for open innovation
  • Untangling the intellectual property rights of any created ideas

Is Open Innovation Right for My Company?

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If you're wondering if open innovation is right for your company, there are several factors that you should consider. If you decide to use open innovation at the wrong time, it can turn into a significant money sink, which is why it's important that you're confident this type of innovation is right for you. If you want to develop a product that will appeal to a large subset of your customers but have yet to develop the product, it might be a good idea to bring customers into the fold and develop a program that would allow your company to obtain useful feedback on potential products.

If your main goal is to develop a quality product that will appeal to customers, open innovation could be highly beneficial as long as you don't need to be the first to reach the market. Open innovation is considered to be great for revisions and refinements of products that already exist. If you are looking to create an invention that's entirely new to customers, you might want to avoid revealing your ideas to third parties.

When you decide that open innovation is the right move for your company, it's important to understand that there are many ways to start using open innovation. You could think about crowdsourcing or opening an innovation lab that's hosted internally while providing access of your ideas to customers. The method that you use depends on what your goals are. However, most open innovation begins with internal ideation with members of the company.

Once these ideas have been gathered, you can source them externally in order to solve problems or enhance current capabilities. You could also go about sharing your intellectual property or ideas with third parties to develop new opportunities for your business.

If you are thinking about using the practices of open innovation or are in the midst of growing your company, consider applying for Orange County's first wet lab incubator that's available here at University Lab Partners. Our incubator offers premium wet lab technology and shared office space that can give you the resources you need to turn your fledgling startup into a successful and thriving business!

Apply today by filling out this simple application.


Revised 11/17/2020


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