The Era of Open Innovation

Companies are increasingly rethinking the fundamental ways in which they generate ideas and bring them to market — harnessing external ideas while leveraging their in-house R&D outside their current operations.

In the past, internal R&D was a valuable strategic asset, even a formidable barrier to entry by competitors in many markets. Only large corporations like DuPont, IBM and AT&T could compete by doing the most R&D in their respective industries (and subsequently reaping most of the profits as well). Rivals who sought to unseat those powerhouses had to ante up considerable resources to create their own labs, if they were to have any chance of succeeding. These days, however, the leading industrial enterprises of the past have been encountering remarkably strong competition from many upstarts. Surprisingly, these newcomers conduct little or no basic research on their own, but instead get new ideas to market through a different process.

Consider Lucent Technologies, which inherited the lion’s share of Bell Laboratories after the breakup of AT&T. In the 20th century, Bell Labs was perhaps the premier industrial research organization and this should have been a decisive strategic weapon for Lucent in the telecommunications equipment market. However, things didn’t quite work out that way. Cisco Systems, which lacks anything resembling the deep internal R&D capabilities of Bell Labs, somehow has consistently managed to stay abreast of Lucent, even occasionally beating the company to market. What happened?

Although Lucent and Cisco competed directly in the same industry, the two companies were not innovating in the same manner. Lucent devoted enormous resources to exploring the world of new materials and state-of-the-art components and systems, seeking fundamental discoveries that could fuel future generations of products and services. Cisco, on the other hand, deployed a very different strategy in its battle for innovation leadership. Whatever technology the company needed, it acquired from the outside, usually by partnering or investing in promising startups (some, ironically, founded by ex-Lucent veterans). In this way, Cisco kept up with the R&D output of perhaps the world’s finest industrial R&D organization, all without conducting much research of its own.

The story of Lucent and Cisco is hardly an isolated instance. IBM’s research prowess in computing provided little protection against Intel and Microsoft in the personal computer hardware and software businesses. Similarly, Motorola, Siemens and other industrial titans watched helplessly as Nokia catapulted itself to the forefront of wireless telephony in just 20 years, building on its industrial experience from earlier decades in the low-tech industries of wood pulp and rubber boots.

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References

1. The early work on PARC comes from D.K. Smith and R.C. Alexander, “Fumbling the Future: How Xerox Invented, Then Ignored, the First Personal Computer” (New York: William Morrow & Co., 1988). The story was revisited in M. Hiltzik, “Dealers of Lightning” (New York: HarperBusiness, 1999). An alternative perspective — that Xerox managers did not “fumble” these technologies but consciously ushered them out the door — can be found in H. Chesbrough, “Graceful Exits and Foregone Opportunities: Xerox’s Management of Its Technology Spinoff Companies,” Business History Review 76 (winter 2002): 803–838.

2. N. Sakkab, P&G’s senior vice president for R&D for Global Fabric and Home Care, described P&G’s new innovation strategy in an address to the Industrial Research Institute. See N. Sakkab, “Connect & Develop Complements Research & Develop at P&G,” Research Technology Management 45 (March–April 2002): 38–45.

3. H. Chesbrough, interview with Larry Huston, August 5, 2002. Huston, director of external innovation at Procter & Gamble, noted as well that the “Connect & Develop” initiative had strong support from P&G’s board of directors and that there has been a board subcommittee working on the issue.

4. Sakkab, “Connect & Develop,” 38–45.

5. “Too Much Ventured Nothing Gained: VCs Are a Hurting Bunch. New Companies Feel Their Pain,” Fortune, November 25, 2002.

6. For an account of Nokia’s R&D approach to GSM, see M. Häikiö, “Nokia: The Inside Story” (London: Financial Times Prentice Hall, 2002), 120–121 (in particular).

7. M. Sawhney, E. Prandelli and G. Verona, “The Power of Innomediation,” MIT Sloan Management Review 44 (winter 2003): 77–82; and J.D. Wolpert, “Breaking Out of the Innovation Box,” Harvard Business Review 80 (August 2002): 76–83.

3 Comments On: The Era of Open Innovation

  • Jonathan Fry | December 18, 2010

    There’s so much room for innovation in today’s climate. Any companies not taking advantage and using their talent to develop new ideas is going to fall behind.

  • Vin DeCal | January 10, 2011

    I guess it’s much easier to implement innovative procedures in smaller to mid-sized comapnies, yet that should be no excuse for the big ones.

    And I have to underline your thoughts, Jonathan – they WILL fall behind. Maybe THIS is part of the self-regulating system and we just have to wait for the “nay”-sayers to disappear.

  • elie zeiter | March 9, 2011

    open innovation vs. closed innovation model

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