This was first published here on 28 January 2015
It is many years since the management guru Tom Peters pronounced: “Innovate or die,” yet its relevance is more important than ever. Have you bought car, life or home insurance recently, or perhaps used the internet to buy Christmas presents? If you did, the odds are that you will have probably used a price comparison website to evaluate and then select the most competitively priced offerings.
The increase in the use of the internet to identify, select and purchase products and services is resulting in greater competition and a consequent reduction in profit margins. These diminishing returns would appear to be creating commodity markets where all prices are visible with the result that there is a convergence in the prices of providers.
Just because something worked successfully in the past is no guarantee that it will be successful in the future and there are plenty of competitors who are out to eat your breakfast! So what can be done to earn an honest return on business investment and improve business performance? The short answer is open innovation, but how should this be done?
The twentieth-century model of innovation was based around firms investing significant sums in building R&D capabilities, recruiting the most intelligent people, getting the innovation to market first, and controlling intellectual property. It worked relatively successfully, but things are very different now in the twenty-first century when people can compare prices or seek out new knowledge and ways of operating.
Henry Chesbrough is executive director of the Centre for Open Innovation at the University of California, Berkeley and his book Open Business Models: How to thrive in the new innovation landscape does what it says on the tin. He describes how many successful businesses such as Intel, Microsoft, Sun, Oracle, Cisco, Genentech, Amgen, Genzyme do not have large research departments, and instead harness the power of developments and research elsewhere to drive their businesses forward.
Chesbrough described the twentieth century model of undertaking research and development as ‘closed innovation’ i.e. it was done in-house. By way of contrast, the twenty-first century model of innovation is ‘open innovation’ which is based upon an environment in which there is an abundance of knowledge from which to draw. The basic principles of this approach include:
– working with smart people both inside and outside the organisation;
– it isn’t necessary to originate research to profit from it;
– external R&D adds value and should be linked to internal R&D to create value; and
– success results from combining internal and external R&D.
Possibly the most important factor in achieving business success is building a better business model rather than getting to market first. As Chesbrough said: “The value of an idea or a technology depends on its business model. There is no inherent value in a technology per se. The value is determined instead by the business model used to bring it to market.”
As we mentioned in a previous article, Michael Porter’s numerous publications on strategy including Competitive Strategy (1980) and Competitive Advantage (1985) have been hugely influential but need some revisions. In particular, Porter’s ‘five-forces’ model was largely focussed at industry level and did not consider the specific strengths of individual firms, nor did it discuss how the barriers to entry might be drastically reduced by accessing other people’s knowledge. And that is the environment in which we now operate. So how can we open our organisational doors to allow external knowledge and innovation to create a successful business model?
1. Employ experts on short-term contracts to critically examine business operations – e.g. interim employment.
2. Team up with universities which are already conducting cutting-edge research – Boeing and Rolls-Royce are both involved with the University of Sheffield’s Advanced Manufacturing Centre (AMC). The AMC model itself is now being innovated upon and rolled out for different industries across the UK.
3. Place some of your research challenges in the public domain to seek answers – e.g. Goldcorp shared its proprietary geological data online so that anyone could analyse it and advise on where to mine for gold. Advice which was successful was financially rewarded.
There are many other ways in which to let open innovation enhance progress in your organisation by reducing the physical and virtual barriers to cross-fertilisation. How open are you to new ways of thinking and operating?
Dominic Irvine and John Wilson Copyright 2015. All rights asserted.