Why Open Innovation Makes Sense

Posted by Adi Gaskell on Nov 14, 2017 6:16:04 AM

Innovation is something that most organizations want to master so that they can survive in our increasingly ‘VUCA’ world. Innovating well is increasingly challenging however. A recent study from the Stanford Institute for Economic Policy Research highlighted the difficulties organizations face in the modern world.

The study examined the productivity of research and development, on both a national as well as industrial scale, and found that organizations need to spend significantly more, both in terms of human and financial resources, to achieve the same kind of results as were achieved in the past.

Despite both research expenditure and the number of researchers deployed in R&D going up significantly, the out is not rising in unison. Indeed, the authors reveal that roughly 20 times as many people are employed in R&D as was the case in 1930.

“It’s getting harder and harder to make new ideas, and the economy is more or less compensating for that,” they say. “The only way we’ve been able to roughly maintain growth is to throw more and more scientists at it.”

The worrying thing is that expenditure on R&D has had to double every 13 years just to maintain the same level of growth in the economy as a whole, with no industry managing to innovate in a cost effective manner. It underlines the challenges we face in innovating effectively and efficiently, with this apparent exponential growth in expenditure unsustainable.

 

Complex innovation

So why is this the case? Innovation is undoubtedly difficult to achieve, with the amount of science going into regular household products quite prestigious. The innovative process itself is changing, and evidence suggests that most innovations today are what’s known as ‘recombinative’. In other words, they take existing ideas and technologies, and apply them in unique ways.

Martin Weitzman highlighted the tremendous potential of recombination in his seminal paper on the topic. In it, he describes the potential for recombination to energize the economy. It describes how the economy is beset with ‘fixed factors’, such as buildings and hardware, and that tremendous growth can be achieved if these fixed items are improved, both by new ideas and unique applications.

In innovation terms, the evidence for this kind of behavior is strong. A recent study examined the patent records held at the US Patent and Trademark Office from 1790 to the present day. Each and every patent in the database was codified to reflect whether it was a truly new concept or a variation of a technology already in existence.

Fascinatingly, approximately 40% of all patents in the database were variations of some pre-existing technology, with the remaining 60% unique and novel. Where things are interesting however is how that figure is changing over time. The analysis found that novel concepts were very much in the majority all the way up to around 1870, at which point the growth in novel discoveries slowed considerably.

If we fast forward to the present day, the trend has reversed completely, with the majority of patents registered today a recombination of some existing piece of work.

 

The power of weak ties

The pleasing thing is that open innovation is ideally suited to help you innovate in such a way. Recombination thrives when we have access to people who are capable of bringing us ideas and technologies from outside of our core network.

It’s a concept that has its origins in John Stuart Mill’s work. Back in the 19th century he wrote that it’s impossible to overrate the value of being in contact with those dissimilar to ourselves, and with modes of thought and action unlike those that we’re familiar with.

This was then built upon in Mark Granovetter famous work around the power of ‘weak ties’. He highlighted how closed networks tended to succumb to groupthink as they were deprived of fresh ideas.

“New ideas will spread slowly, scientific endeavours will be handicapped, and subgroups that are separated by race, ethnicity or geography will have difficulty,” he wrote.

By contrast, when networks are open, they allow ideas to flow from the edges, with ‘brokers’ able to connect up seemingly disparate environments and spread ideas into new fields.

It’s here that open innovation is so powerful, because it allows your organization to tap into wide and diverse sources of talent and ideas. You’re not limited in any way by the networks you already have or the connections you are able to call upon. The right open innovation platform can instead give you access to a global marketplace of talent and inspiration.

It’s perhaps no surprise therefore, that many of the challenges posted onto open innovation platforms are solved by people outside of the specific domain of the challenge itself. Physics challenges are solved by biologists, biology challenges by computer scientists, and so on.

What’s more, because you don’t have to actively maintain this network, you remove many of the cost pressures outlined in the study that I began this post with. You’re not required to invest heavily in maintaining a diverse and expensive R&D department as you can tap into the global talent pool as and when you need it.

 

The ROI of open innovation

As the saying goes, the proof of the pudding is in the eating, and exponents of open innovation are revealing how the theoretical benefits of open innovation are very much translating into material benefits. I wrote earlier this year about a recent analysis of open innovation usage across Europe, and the paper revealed that around 60% of practitioners were seeing a radical improvement in their ability to launch new and innovative products. What's more, a majority of respondents reported a pronounced ROI on their open innovation activities, which largely resulted from being able to develop successful new products, get them to market faster, and reduce the risks associated with innovation.

At a time when the costs associated with innovation are rising significantly, or as the Stanford paper mentioned at the start of this post says, “the economy has to double its research efforts every 13 years just to maintain the same overall rate of economic growth.”

That’s clearly not sustainable, and whilst I wouldn’t profess to say that open innovation is some kind of silver bullet, the evidence to date suggests that it is an efficient and cost-effective way to find new ideas.

This post is the first of two, with my next looking at how you can build a culture within your organization to fully capitalize on open innovation. Coming soon.

 

Topics: Innovation Insights

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