Competitive Advantage Through Open Innovation: Insights from Absorptive Capacity Theory

Posted by Jo Edwards on Oct 10, 2017 9:24:06 AM

In these fast-changing times, the established models of innovation are being challenged. Rather than innovation from within – what’s been called an ‘invent-it-ourselves model’[1] – organizations who want to stay ahead are now looking to adopt different approaches. This article looks at how one such model – open innovation – can contribute to competitive advantage by following three vital steps.

Why is open innovation important?

Open innovation brings different stakeholders together – other major firms, public sector bodies, universities, small business, individuals, and other agencies – to develop new ideas for products and services. Working in these types of networks can reduce research costs, spread the risks of innovation and, in some cases, increase the speed at which new products are brought to market.[2] It can also mean that products are more relevant, and provide more effective solutions. Reduced costs and timescales, and enhanced effectiveness, are the key ingredients for competitive advantage. 

The open innovation model works because the world is changing. Gone are the days when firms kept all their knowledge to themselves. Technology and globalization have created a more connected world, and organizations have recognised that they need to look outside their walls to access the best talent.[3] But how do companies make sure the ideas translate into competitive products? By looking at this question through the lens of absorptive capacity (i.e. the limit to how much scientific or technological information a firm can absorb), we identify three key steps to help organizations prepare.[4]

Step one: Recognise innovation 

The first step in creating this “open innovation ecosystem”[5] is to recognise external opportunities for innovation. Looking outside an organization’s standard research & development model can lead to new resources and ideas. This might be done by scanning the external operating environment – markets, technologies, and partners ­– or by regular evaluation of emerging research in specific areas. Insights can be gained by attending conferences and trade fairs, joining professional associations, creating links with universities and research institutions, and contacting the local start-up community. Other approaches might include asking for contributions from individuals – through competitions, online platforms, or user groups, for example – and working with existing stakeholders to identify potential opportunities.

Looking at the operating environment in this way can bring a range of benefits to your organization. Not only will it encourage a more open culture, and reduce staff inertia, it could also provide access to new technologies, different skills and expertise in engineering and R&D, and new resources.

Step two: Integrate the assets

Once you’ve identified relevant external sources of innovation, the next step is to understand them in relation to your organization. This assimilation phase focuses on creating the right internal environment to benefit from the external knowledge. Strong leadership is essential to develop a mind set and culture that embraces open innovation.[6] Successful companies are the ones that reward the right behaviours through incentives and that build opportunities to coordinate the spread of resources, through new boundary-spanning roles. Tools and processes can be developed to support the implementation of the new resources, and knowledge management systems can be introduced so that the external knowledge can be disseminated across the business. 

What does this assimilation achieve? If successful, it will enable an organization to determine the value of the new ideas, particularly in terms of strategic and cultural fit. It focuses on evaluating the relevance of the external resources in relation to both existing internal competencies and current market segments. The process translates the knowledge and ideas into resources that can be used inside your business, creating what have been labelled “firm specific assets”.[7]

Step three: Create new opportunities

The final step in the process is to take the external assets, that have now been placed into an organizational context, and grow new opportunities from them. This might mean entirely original products or services, sparked by the integration of external and internal resources. Or it might come from a novel way to combine old products and services, resources and capabilities, to create something entirely different. Underlying the ability to exploit the assets is an understanding of gaps in knowledge and skills – and problems to be solved – so that new opportunities can be developed.

How does this work in practice? There are strong examples from a wide variety of global companies. Apple, for example, developed the first-generation iPod, using an idea that was presented to them by an independent product designer. Multiple partners were involved in the both the development and production of the product, including Phillips, Ideo, and Toshiba.[8] And Proctor & Gamble, global manufacturers and marketers of consumer products, have embraced the open innovation model through their Connect + Develop site, leading to the development of new products as diverse as Olay Regenerist, Pringles, and Swiffer Dusters.[9]

Competitive advantage from absorptive capacity

Each of these steps represents an essential part of the process of open innovation that can contribute to the competitive advantage of a firm. The absorptive capacity of an organization sums up these stages, reflecting the ability of a firm to recognise, assimilate and then exploit external resources. And benefits extend beyond new or revamped products and services. Employees can become more engaged, as they have greater involvement and ownership of the innovation process, and businesses can get to know their customers, by inviting them to contribute to problem solving.

Applying open innovation to your business

So, what can you do to encourage this type of innovation? First, you need a clear message from the top. Your organizational culture and senior management both need to support an openness towards looking outside your firm for ideas, skills, and expertise. Next, you need to create the internal environment that encourages employees to share what they’ve discovered, understand the opportunities and place the external resources within your specific setting. Finally, you need to build the conceptual and creative space to put the now assimilated knowledge to use, either in entirely new products and services or by developing novel combinations. The key take away? Each of the steps must be fully embraced to give you the best chance for competitive advantage.

 

Sources

[1] ‘Connect and Develop: Inside Procter & Gamble’s New Model for Innovation’, https://hbr.org/2006/03/connect-and-develop-inside-procter-gambles-new-model-for-innovation. Accessed on 13 September 2017.

[2] The Benefits of Open Innovation, https://www.weforum.org/agenda/2015/02/the-benefits-of-open-innovation/. Accessed on 12 September 2017.

[3] How to profit from open innovation, https://execed.economist.com/career-advice/industry-trends/how-profit-open-innovation. Accessed on 12 September 2017.

[4] The three stages draw on the research and ideas in: ‘Benefiting from Open Innovation: A Multidimensional Model of Absorptive Capacity’, Ann-Kristin Zobel, J PROD INNOV MANAG 2017;34(3):269–288


[5] ‘Opening up for competitive advantage – How Deutsche Telekom creates an open innovation ecosystem’, Rohrbeck, R, Hölzle, K.. and H. G. Gemünden R&D Management,Vol. 39, No. 4, pp. 420-430, 2009

[6] How to profit from open innovation, https://execed.economist.com/career-advice/industry-trends/how-profit-open-innovation. Accessed on 12 September 2017.

[7] ‘Benefiting from Open Innovation: A Multidimensional Model of Absorptive Capacity’, Ann-Kristin Zobel, J PROD INNOV MANAG 2017;34(3). P275.

[8] ‘Opening up for competitive advantage – How Deutsche Telekom creates an open innovation ecosystem’, Rohrbeck, R, Hölzle, K.. and H. G. Gemünden, R&D Management, Vol. 39, No. 4, 2009, p421.

[9] ‘An example of Open Innovation: P&G’, Nesli Nazik Ozkan, Procedia - Social and Behavioral Sciences Volume 195, 3 July 2015, Pages 1496-1502

Topics: Innovation Insights

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