Importance of Open Innovation in Firm Development Analytical Essay

Open innovation is quickly carving out a dominance in today’s corporate world, championed by among others, world-renowned author of “Open Innovation: the New Imperative for creating and profiting from technology”, Henry Chesbrough.

When analyzed from this point of view, open innovation is a new paradigm that seeks to benefit from the advantages of technology through processes such as user innovation, cumulative innovation, know-how trading, mass innovation and distributive innovation (Tilburg University 2010, p. 2).

Gawarzynska (2010) explains that “Open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology” (p. 2).

Open innovation is especially important in today’s chaotic and turbulent business environment because interactions between firms and their external environments have become more permeable than ever before and open innovation facilitates the inward and outward movement of information to benefit organisations.

The concept of open innovation solely stems from the fact that, in today’s business world where information is very extensive, firms can no longer depend on their independent studies; instead, they are prompted to buy or license processes or innovations from other companies (for example through joint ventures, innovations, franchises and the likes), in addition to carrying out their independent innovations (Tilburg University 2010, p. 3).

Perhaps, to properly understand the concept of open innovation, it is best to comprehend that open innovation is a new paradigm and a deflection from the previous idea of closed innovation. Closed innovation symbolizes internal corporate venturing only.

However, because the technological world is quickly changing, firms have come to realize that they cannot only rely on internal corporate venturing; instead, they need to undertake its opposite, external corporate venturing. External corporate venturing has become the new element in most of today’s firms’ long-term business strategies (Tilburg University 2010, p. 3).

This strategy incorporates a systematic corporate scanning of both the internal and external corporate environments. In this paper, we will seek to give a general analogy on the firm-specific competencies associated with the emerging trend towards open innovation. This will be done by first understanding the conceptual analysis of open innovation and identifying areas where firms fall short of institutionalizing the concept.

Conceptual Analysis

We have already established that open innovation advocates that firms take advantage of their external ideas and concepts to improve their operations, however, this conceptual analysis points out the fact that in as much as firms seek to expand their innovative practices, they don’t exhibit the same type of enthusiasm in committing funding to expand internal competitive capabilities.

Propelled by competitive product differentiation, many firms have dabbled the concept of open innovation, instead of institutionalizing it (Blackwell, 2008, p. 5). On the other hand, other companies have aggressively adopted the concept, after being motivated by the potential of leveraging outside sources of innovation (because of consistent commitment to the success of the idea) (Blackwell, 2008, p. 5).

Open innovation is a tool just like any other, and most of the time, it requires a high level of commitment by firms to institutionalize its operations for optimum results. For instance, when analyzing the implementation of total quality management at Nerac Inc, a local Asian company, it was established that the company experienced a lot of challenges in implementing and institutionalizing open innovation (Blackwell, 2008, p. 5).

The biggest failure identified was that the company failed to properly commit to the new concept, and so it was bound to fail from the beginning (Blackwell, 2008, p. 5).

Currently, many firms are only beginning to warm up to the concept of open innovation and many are equally beginning to discern the best practices from these efforts (Tilburg University 2010, p. 3). Firms have also noted that they are bound to realize more profits while experiencing fewer pitfalls if they apply the open innovation concept, as opposed to the previous concept of closed innovation.

Despite the warm remarks made of open innovation, many firms have little to write home about, regarding the implementation of the concept.

The core areas identified as producing these limited results lie in the “not invented here” syndrome; poor management focus and endorsements; lack of process for finding, vetting and leveraging outside sources of innovation and a lack of concern on intellectual property rights (Blackwell, 2008, p. 7).

Nonetheless, a deeper probe into the underlying reason why firms have constantly failed to cement the results of open innovation lies in the disconnection between the open innovation theory and its actual implementation and execution.

At present, most firms and companies are still entangled in the age-old strategy of product innovation (Tilburg University 2010, p. 3). This strategy may not be beneficial in the long run when analyzed in the context of open innovation as is affirmed by Blackwell (2008, p. 8) who gives an example that:

“a company making a new pet food may explore new approaches to meat by-product processing or flavoring technologies through open innovation, but they may not consider other innovations downstream in the product lifecycle, such as packaging, cross-pallet shipping, or cross-promotion strategies, which may benefit from the knowledge of supply chain partners”.

Also, many faults have been identified in applying open innovation strategies at the product design stage because most often than not, it leads to “innovation to specification” where solutions and challenges are advanced to solution partners in the hope that they come up with a solution that best conceptualizes the product innovation process.

Another significant shortcoming in implementing open innovation lies in the fact that there is a clear lack of group corporate vision which empowers people to think out of the box (Blackwell 2008, p. 4). This is bound to significantly reduce the chances of encountering defective technologies which can be leveraged.

Research studies done through an analysis of the client bases of several firms however note other concerns associated with the implementation of open innovation by coming up with the conclusion that firms often encounter internal problems of their own making (other problems are however unavoidable when implementing the concept) (Blackwell 2008, p. 4).

From the studies, it was established that many firms facing challenges in implementing open innovation were basically in their early stages of implementation and this made them highly prone to disadvantages associated with trial and error (Blackwell 2008, p. 3).

Secondly, it was established that the initiative of implementing the open innovation concept was usually left to one party, which most of the time had other commitments apart from seeing the idea become a success (Blackwell 2008, p. 4). The critical challenge to achieving a successful open innovation program in this context is marshaling enough support from the firm to see the concept become a success.

Also, in this light, for a cultural change that facilitates the new paradigm to be implemented, there needs to be a comprehensive organization-wide understanding of the concept of open innovation.

Thirdly, it was established that many companies usually have no point of contact to corroborate their innovation practices in the organization, thereby making the goal of implementing and coordinating open innovation practices quite challenging to achieve (Blackwell 2008, p. 7).

Fourth, it was established that many companies are usually proponents of encouraging their staff to seek answers out of the organization; a practice that can be associated with the “never invented here syndrome” since many managers have very little faith in their organisations (Blackwell 2008, p. 5).

Lastly, it was established that many organisations are likely to expand their networks through multiple innovation models as opposed to sticking to one system at a time (Blackwell 2008, p. 4).

These factors outline the reasons why firms have in the past failed to succeed in enjoying the benefits of open innovation. However, firms which have successfully implemented the concept and enjoy its benefits (or are willing to do so), a pool of benefits is to be derived from open innovation. They are discussed below.

Tackling Business Uncertainties

New business ventures and business expansions come with a lot of uncertainties. This is normally characteristic of the early stages of business development, touching on market acceptance and technological uncertainties. Research affirms that one of the best ways for organisations to cope with this uncertainty is making small but gradual investments in technology through open innovation (Chesbrough 2006, p. 11).

These small investments can be regarded as real options; meaning that it is a right and not an obligation to take action in the future. This strategy can be used to hedge uncertainties in the general business environment because making small investments in technology creates alternative options of doing business as the potential effects of business uncertainty decreases.

Once it is confirmed that the uncertainty in the business environment has decreased, businesses or firms can then make a sound decision of carrying on with their investments (or new ventures, depending on the analysis of the situation).

Through this understanding, we can be able to comprehend how successful firms evaluate sequential investment decisions regarding outsourcing certain technological services as described in the option innovation strategy.

To a significant degree, De Jong (2010, p. 7) supports this statement by noting that “this is applicable at the fuzzy front end of the innovation funnel where R&D co-operation with upstream technology providers and corporate venturing plays a crucial role in reducing the uncertainty inherently present in early phases of technology ventures”.

In practical terms, option innovation allows firms to explore alternatives of dealing with the uncertain business environments by exploring options such as joint ventures, franchising, equity alliances, spin-ins, and the likes.

In this context, firms can develop competencies through the creation of options and value by generating future decision rights: such that, relevant firms are bound to have a very flexible long term strategic plan to spur organizational growth.

The level of strategic flexibility becomes even more beneficial to the organization if it operates in highly uncertain environments because of the high returns associated with highly uncertain environments. Through continuous additional investments in technology, firms can best understand future technological needs and decide at which point when undertaking future investments, they would provide additional investments.

This strategy makes corporate investment decision a compound strategy where firms have the option of adding additional inputs to their overall investment plan before they pull the plug.

However, before businesses can enjoy this advantage, they first have to thoroughly evaluate their business models to determine if specific investments are in tandem with their organizational growth blueprint.

In previous cases where the closed innovation model was in use, firms would simply evaluate whether environmental risks in the market were too significant to bear (or not), and if it were, they would simply abandon such an option (Chesbrough 2006, p. 11).

However, in the open innovation model, firms can license or sell such options to other firms which may have a business model that accommodates the venture option. Chesbrough (2006, p. 11) also affirms this fact by noting that:

“Open innovation allows innovating companies to sense developments in a wide range of externally developed inventions by buying minority stakes in (high-tech) startups, participating in venture capital funds, or by providing educational investments in promising projects at universities or research labs”.

This analogy specifically defines the option creation process, commonly associated with open innovation because it helps firms know more about the technological need of new projects as well as obtaining new information regarding future projects (Chesbrough 2006, p. 13).

In addition, firms can also evaluate more future options of investment because they are able to enjoy the increased potential of real options by being enabled to scan a wider range of appropriate technologies or new market developments. The contrary outcome from closed innovation would be writing options on internal projects alone.

The benefits associated with scanning a broader range of future technological options come with increased financial returns because there is a high probability that there are more lucrative future options out there; probably not even correlated with the firm’s internal processes.

The outcome of exploiting these technologies is alpha because of the probability of higher financial returns and lower beta because of the diversification of options through external technologies (Chesbrough 2006, p. 13). This outcome presents a scenario where a firm is likely to develop a business portfolio that is much more resilient with regards to the external uncertainties of the business environment.

Improvement of the Organizational Learning Process

The advantages associated with learning new processes has been researched by many scholars for many years and they identify that the benefits of adopting open innovation are numerous because it advances the upward potential of human development projects, in addition to limiting downward risks associated with the same ventures (Herzog 2007, p. 71).

When analyzed in this context, firms have to speed up learning and development processes so that they can enjoy the benefits of more attractive technologies and applications, but contrary to general expectations, this process does not happen automatically. However, in making this strategy a success, organisations have to develop new skills, strategies and routines to achieve optimum results.

For instance, it is not recommended that firms undertake a random scanning of the external technological environment because this can lead to wastage of time and money, coupled with the potential outcome of adopting wrong technologies (Backer 2008, p. 40).

These sentiments are also held by Nobel Laureate Herb Simon (cited in Herzog 2007, p. 71) who notes that “where there is a wealth of information, there is a poverty of attention”. Firms have to, therefore, learn about existent technologies out there which provide excellent opportunities for growth.

In other words, they have to undertake a comprehensive analysis of trends in research and development of new technologies but more importantly, they must be skilled at recognizing new ideas which may be important to the overall progression of organizational growth (while eliminating the vast volumes of numerous information which have the potential of distracting the firm from achieving its goals) (Backer, 2008, p. 40).

Thus, it is correct to note that firms which practice open innovation are poised to better tap into the vast opportunities of growth, existent in the external business environment. However, before organisations get to learn the art of tapping into the potential of external sources, they may require years to learn the skill.

It is therefore imperative that organisations which seek to develop these new competencies develop core skills in this area but at the same time, also develop routines which will enable them be effective enough to tap into the same potential.

Research affirms that making small but gradual investments in technology enables most organisations tap into the potential of a variety of different technologies, but this is not to be assumed that the process is a passive activity, whereby firms automatically benefit from the spillover of technological benefits by other firms (Blackwell 2008, p. 4).

In other words, it requires purposeful investments and process developments to derive the benefits of future technology; meaning that, it is the purpose of the research and development (R&D) department to be properly aligned to external technology, after a thorough interaction with internal parts of the firm, so that the firm can directly benefit from the benefits of open innovation (Herzog 2007, p. 72).

When this is effectively done, firms are bound to increase their absorptive capacities and to a large extent, this is a prerequisite for the careful evaluation of viable investment options in the market (Backer, 2008, p. 40).

Researchers note that the larger the options available in a given portfolio, the stronger an organization is likely to be, in terms of absorptive capacity (an attribute which is very important in the option innovation paradigm) (Backer, 2008, p. 40).

Since many firms are usually faced with the dilemma of improving their inner technological welfare at the expense of external technology, the absorptive capacity developed at the early stages of firm development is likely to blend the firm’s quest to harmonize the needs of the two avenues of technological development by identifying the best avenues to invest.

Also, when the risk or uncertainty of new investment decreases and the apparent opportunities increase, a high firm absorptive capacity is likely to prompt the firm to make the right decision (Herzog 2007, p. 72).

Data Searching and Mining

Considering open innovation initiates the two-way process whereby organisations benefit from both internal and external technologies, open innovation can help harmonize internal and external resources to the benefit of a firm’s growth. Elements like corporate intranets fall in this category because they create some form of reporting system where a firm can search and mine for important data and share relevant knowledge as well.

Employees, as well as managers, can also be in touch with each other, across the world, through facilitation by the Innovation net which works through the accounts of user’s interests; meaning that the medium only connects people who have similar interests.

Besides, the exchange of information among business partners through the intranet network across different countries can also facilitate the exchange of information among various communities of practice, such as technology entrepreneurs, organic chemistry and many more (depending on the type of business a firm is engaged in).

Thus, there is no difference between the exchange of information between internal and external sources of information because firms can seek information from external partners, the same way they would internal ones; in the same manner, they can also share essential links to access foreign databases.

This practice facilitates a firm’s growth and prompts it to be more versatile and current with prevailing business practices (Blackwell 2008, p. 4).

Simulation and Modeling

The open innovation paradigm, when implemented in any firm, can significantly improve the supply chain system. This is because open innovation helps the firm link better with suppliers through the improvement of the supply chain management processes.

Eventually, some form of ultimate chain supply system can be realized. An open innovation process can be able to perfectly empower organisations derive these benefits because it integrates, information, materials, products and financial activities for the firm to achieve optimum profit maximization from sales, and cash flow (Blackwell 2008, p. 4).

In addition, the system can also enable a firm avail the right products at the right time to its consumers and at the same time, reduce the costs associated with availing the same products.

Organisations which have been able to derive these benefits do so by designing effective supply chain systems through optimization and simulation techniques that synchronizes planning cycles and production schedules to solve capacity utilization issues (Blackwell 2008, p. 4). Through this process, the firm can derive the benefits of open innovation through closer coupling of supply chains.

Problem Solving

Open innovation enables firms to quickly and efficiently solve their internal problems through the utilization of a network of experts from the external business environment. Specific companies such as Proctor and Gamble, IBM and Dell have been able to benefit from this advantage by coming up with viable solutions for their organizational challenges, as well as coming up with marketable designs for their products.

Some researchers have described this process as “crowdsourcing”, implying the outsourcing of solutions from the crowd (who are the external business partners) (Tilburg University 2010, p 6).

Tilburg University (2010, p 5) explains that “crowdsourcing describes a new Web-based business model that harnesses the creative solutions of a distributed network of individuals through what amounts to an open call for proposals”. Since this definition has been termed vague in some quarters, Tilburg University (2010, p 7) went on to explain that:

“crowdsourcing represents the act of a company or institution taking a function once performed by employees and outsourcing it to an undefined (and generally large) network of people in the form of an open call.

As stated by Tilburg University (2010), “This can take the form of peer-production (when the job is performed collaboratively), but is also often undertaken by sole individuals”. The crucial prerequisite is the use of the open call format and the large network of potential laborers.

The second definition is more elaborate and explains (though not directly) that open innovation (which describes the outsourcing of information from external business partners) defines the collaborative participation or single party participation to solve firm problems in an amicable way through open calls.

Conventionally, this does not happen through outsourcing of information from a predetermined group of experts but from a random group of professionals. However, some firms outsource information from a predefined group of experts, probably through a contract agreement or partnership to facilitate the process (Tilburg University 2010, p 6).

Operational Control

Open innovation can potentially help a firm control its operations, especially when it is involved in projects projected to cost more than the organization can sustain. Open innovation assists such companies have an alternative to undertake the same projects but with manageable costs of manpower inputs (Blackwell 2008, p. 4).

Moreover, if the firm adopts open innovation, it is likely to gain more from an influx of potentially beneficial managerial skills from external organisations. Organisations which seek to keep their operational costs in check should strive to adopt open innovation because it precisely helps to properly manage operational costs, especially with regards to departments which have evolved over time to become inefficient and costly.

For instance, an information technology company which probably has an overwhelming demand for projects without adequate staff can potentially benefit from open innovation because an outsource agreement will enable management to prioritize their requests and bring back control to the firm. In turn, this brings us to another core advantage firms can gain from open innovation, focus on core activities.

Focus on Core Activities

In times of tremendous growth, firms usually experience an expansion of back-office operations which also increases the demand for more human capital. Also, with the increase of firm operations, due to growth, more resources are needed to support the growth and this may imply an increase in more human and financial input, at the expense of core activities the organization emphasizes on.

A loss of focus may potentially prove disastrous for the business in the long run, mainly because the firm may lose its core business competency (Tilburg University 2010, p 6). However, firms can avert this eventuality if they adopt open innovation by outsourcing the increased activities, such that, the firm can still concentrate on its core area of focus.

For instance, if a firm experiences a surge in product demand, which consequently leads to an overwhelming increase in purchases, under open innovation, the firm can potentially outsource its purchases to external organisations.

In this manner, the firm can potentially improve the output of its activities, primarily if it outsources these processes to well competent corporate partners, since maintaining a grip on these activities, while the organization lacks the core resources to produce the best results, may lead to the output of poor products or services.

Open innovation, therefore, provides an alternative for the company to input the best resources from a partner organization which has the best capability to do so (hence the realization of better products and services). This may eventually lead to an improved performance of the firm and better satisfaction of customers, with regard to the final products and services.

Reduced Overheads

When a firm’s operations become increasingly costly, the firm may potentially experience a lot of strain in trying to manage its costs and this may consequently lead to the liquidation of a company in the long run, if the same situation persists.

Open innovation, however, provides a solution to such problems because it gives an avenue for the moving of light operations to other competent organisations, probably at a more reasonable cost (Fasnacht 2009, p. 111).

For example, in a doctor’s office, the administrative staff may experience challenges dealing with the processing of insurance claims, leading to delays in patient service and worker burnout. It would, therefore, be a relief for the office if it decides to outsource this task to an external medical billing company to ease the backlog of insurance claims tasks.

This may eventually reduce the overall overheads of the firm because sometimes, undertaking the same insurance claims processing operations for a long time may lead to increased costs such as office space and increased labor costs. Open innovation in this context may operate best through services such as telemarketing, data entry and the likes.

Also, in reducing the overall overheads of the firm, an adoption of open innovation enables a firm to “visualize” its costs because for every firm, the billable hours ought to be accounted for and outsourced firms are known to be very efficient in accounting for billable hours (Fasnacht 2009, p. 111).

In other words, a firm does not have to pay an employee who shows up to work and slacks off, then eventually gets paid at the end of the month. This increases the level of efficiency in the organization because under open innovation, a firm only seeks the services of an external organization when the need arises and in so doing, they get to only pay for what they have consumed.

Continuity and Risk Management

Open innovation reduces the threat to firm continuity, especially when a firm relies a lot on a few key employees. This situation may also potentially cause increased operational risks, especially when the key employees are unavailable.

This situation is normally aggravated in small business enterprises where the owners of the businesses withhold a lot of information on how the firm operates. Such firms are like advocacy firms, medical firms and the likes. These organisations (especially when in their start-up stages) tend to depend on the input of a few key individuals, thereby increasing the risks of continuity when such employees are not there.

Open innovation provides a remedy to this situation because if properly applied, guarantees continuity and reduces the risks involved for firms’ operating under such circumstances (Pokojski 2010, p. 397).

For instance, in periods where the organization is operating under conditions of high employee turnover, the firm may potentially be very inconsistent in the way it carries out its operations, leading to a state of poor firm productivity and a possible loss of business in the long run.

Open innovation will enable the company think out of the conventional method of practice and seek the services of other competent employees out there, to provide stability to the firm while plummeting the threats associated with inferior levels of business operation.

For instance, if a firm’s human resource department is heavily reliant on its HRM manager who goes on a medical leave and the administrative officers left in charge leave the organization without notice, open innovation averts a situation where the firm’s HRM operations grind to a halt by outsourcing the entire functions of the HRM department to another company suited for that job. Open innovation, therefore, provides continuity to the firms’ operations and controls the risks associated with such eventualities.

Developing Internal Staff

Open innovation provides an opportunity for a firm to develop its internal staff through the out spill of benefits associated with open innovation. This normally happens because some organisations are not necessarily equipped to take up all the necessary projects they are supposed to. In this manner, open innovation increases the company’s alternatives of undertaking big projects, completing them on time and in good quality.

Since a firm gets the opportunity to get competent employees who can complete a given project in time (which internal staff cannot, because of incompetence), a firm can improve its internal staff by letting its staff work with the outsourced employees to improve their skill level. In affirming these sentiments, Pokojski (2010, p. 397) gives an example that:

“If a company needs to embark on a replacement/upgrade project on a variety of custom-built equipment and the engineers do not have the skills required to design new and upgraded equipment, outsourcing this project and requiring the outsourced engineers to work on-site will allow your engineers to acquire a new skill set”.

Improved Quality of Service

When firms adopt open innovation, there is a high likelihood that the products or services they pay for will be of a higher quality than if they were to produce the same internally. This is true because outsourced firms are known to uphold a high standard of performance and quality through the production of performance reports, instruments of performance measurement and the likes.

Michaels (2010, p. 3) affirms that “the effective communications between business tasks improves at every level and also make sure that Information Technology resources are not at all being misused”.

This statement emphasizes the fact that open innovation significantly improves a firm’s efficiency but in addition to this benefit, firms which adopt open innovation are likely to get an almost 24 hour support for their processes (depending on the type of outsourcing firm) because outsourced firms tend to have a 24/7 support system which is available to partner firms at very reasonable costs (Michaels 2010, p. 3).

Finally, employees brought into an organization from a network of partner firms tend to drive budgeting and planning improvements.

Conclusion

As the corporate world keeps on changing, open innovation is standing out to be the new frontier in firm development. Its core area of competency comes from the fact that it supports the flow of valuable information, both from within and out of the firm.

The flow of information can also be evidenced in the outflow of data from both internal and external sources of the market. This function is especially vital in today’s world of immense and extensive information.

From this study, we conclude that firms can tremendously increase their core areas of competency by tapping into the benefits associated with consulting from a wide pool of experts.

This means that partners sourced from outside the firm can propel a firm to new heights of success by facilitating the development of creative and innovative ideas for the company; a benefit which could potentially slip from the company if it only relied on its internal employees for innovative ideas.

Other areas identified to create leverage for an organization through the adoption of open innovation comes from the benefits firms are likely to enjoy from outsourcing services to external organisations.

This includes tackling business uncertainties, improving organizational learning, data searching and mining, simulation and modeling, problem-solving, operational control, improving focus on core activities, reducing overheads, continuity and risk management, developing internal staff, and improving service quality. This study identifies these areas of competency as the most basic in the trend towards open innovation.

References

Backer, K. (2008) Open Innovation in Global Networks. New York: OECD Publishing.

Blackwell, K. (2008) Open Innovation: Facts, Fiction, and Future. Web.

Chesbrough, H. (2006) Open Innovation: The New Imperative for Creating and Profiting From Technology. Harvard: Harvard Business Press.

De Jong, J. (2010) Policies for Open Innovation: Theory, Framework and Cases. New York: Tarmo Kalvet.

Fasnacht, D. (2009) Open Innovation in the Financial Services: Growing Through Openness, Flexibility and Customer Integration. London: Rutledge.

Gawarzynska, M. (2010) Open Innovation and Business Success. New York: Diplomica Verlag.

Herzog, P. (2007). Open and Closed Innovation: Different Cultures for Different Strategies. New York: Gabler Verlag.

Michaels, D. (2010) Outsourcing Information Technology – The Advantages. Web.

Pokojski, J. (2010) New World Situation: New Directions in Concurrent Engineering: Proceedings of the 17th ISPE International Conference on Concurrent Engineering. New York: Springer.

Tilburg University. (2010) Open Innovation: The Benefits of Crowd Sourcing. Web.

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