Reviewing Open Innovation

Knowledge is owned by no one, but it belongs to everybody 

Knowledge is a Public Good, and so are scientific discoveries based upon previous knowledge that open the door to technological innovations, thus improving our lives (or at least to those who can afford them). In previous posts was explain the nature of Public Goods and some of the problems that arise during the production process. 

If we understand that first we should worry about how to generate those breakthroughs and as a second step how to distribute their benefits among society, we might be interested in new ways of organizing the innovation production (something we already done in CBPP). In particular, this post is a review of what is known as  “Open Innovation” (OI). 

The technological jump given (mainly) in the last century has lead to the democratization of knowledge and information. Nowadays, media rely each time more on communication means that emerged or evolved in the last couple of decades and reach not only faster but cheaper to the public. New technologies are also employed in education and as a tool of academic divulgation. I’m not being too original if I say that today, more than ever in the developed world Knowledge is owned by no one, but it belongs to everybody. 

With the “Open Innovation” concept, Henry Chesbrough remarked the obviquity of the technology that unlocks the access to the masses to a great amount of contains, only available for a minority before, by drastically reducing the time between requesting and obtaining information. 

This framework of knowledge, easy reachable to everyone, gives place to the following situation: if firms want to insure their survival in the market they ought to buy, license and even merge with other companies in order to obtain the “know-how” or the technologies to be able to compete face to face against other firms. In other words, firms can’t blindly trust only on their own R&D, if they want to remain alive they have to apply the popular saying: “if you can’t lick them, join them”. Moreover, from the O.I. point of view, organizations should try to sell the part of internal research not directly applicable to their business model to others that could find it interesting.

Giving a thoroughly thought to Chesbrough’s terminology, this is only labeling already existing interactions between firms. Though, this doesn’t mean we shouldn’t give a deeper analysis to the subject. 

First, it’s important to consider that if he was talking about O.I., there must be some concept referring to “Closed Innovation”. Defining the latter it’s easy, just consider one firm limiting its innovation to that produced by its own R&D department with little influence from outside. 

Second, what are the advantages of the “Open Innovation”? Answering may sound also redundant, but obviously using other people’s discoveries or advances saves the company all the associated expenses involved in the process, among others: risk of the research uncertain outcome, time spent on getting inspiration, creativity and originality of the project, execution, development and implementation. To put it simply, we are talking about a R&D externalization method to avoid the costs described above. 

Apart from that, we should think of the advantage of arriving late. It’s well known that “who hits the first, hits twice” (popular saying, again). But in the technological market, where first trials are hardly successful, a firm could save a lot of money learning from its competitors mistakes and so skipping a market fiasco for instance, due to technical reasons (click here for a couple of examples) or market maturity (remember Newton?). 

Furthermore, acquiring other’s companies developments could be the starting point to create their own. Thereby, they save the base technology R&D and they can invest that money in producing a flashy new invention. Mostly, the O.I. model promotes firms’ cumulative innovation. 

Nonetheless, continuing with the proverbs, “all that glitters is not gold”. Clearly, a firm can’t only opt for implementing O.I. as its innovation strategy, because drawbacks of this can be founded easily. Open Innovation may represent loss of control of the research development. In the case of non-generic or non-base technology this fact might be crucial, since the firm should contemplate the expenses of buying the license and also customizing to its business model. As a result, they should evaluate if they are really saving money hiring external R&D and if they want to position themselves as leader company or not,  which is the case of Apple’s latest hit the iphone and ipod touch, which rely their success on using technology none of the firms in the market was implementing. 

Aside from that, O.I. does not implies firms are saving license, partnership or patent costs, which for instance in the software business may arrive to millionaire amounts. Besides, they will still have to adapt the innovation to their internal structure, what can be translated into: the extra cost of hiring someone to do it for them or the cost of doing the customization by themselves.    

In a nutshell, an as a way of concluding this post, we could say “Open Innovation” is the business model in which the firm determines what external information to bring inside, and what internal information to take outside.

Business Models based on Open Source

As all successful business, to start up you need a good idea, as simple as that, as difficult to find too. What it could mainly be reduced to: a profitable, viable and robust plan.

All businesses are about trust and engagement. But when we are  talking about  Peer Production Business Models, we are referring to an entirely new perspective of commitment, involving the firm itself, its CEOs, managers, employees, partners, suppliers and costumers.

(For the most traditional audience, is the kind of the spirit of the government of the Caixas in Spain or Germany, which is constituted by its founders, advisers, executive managers,  employees, and costumers)

This will represent a step forward, taking advantage of all the positive externalities of an networked and cooperative environment. To be more specific, this organizational form, where hierarchies are diluted, provides more fluency to the communication, information, knowledge and workflows. And it is also more efficient allocating resources related to human capital such as skills, motivation and incentives, professional experience, etc. Apart from more efficiency in Continuous Improvement procedures. Implicitly, this is defining a consistent and qualified source for new ideas to deploy, and at the same time helps to create the perfect frame to see new business opportunities. Moreover, it could represent a significant reduction of operative costs due to the risk sharing given by the implication of all interested parts and less need of buying licenses among others.

With all this, I am not saying that I see there will be rivalry between the traditional hierarchical firm and this new organizational form. Furthermore, I believe both may coexist and even merge on a somekind of natural selection. Firms with best aptitudes to absorb strengths from both: the Peer Production and the old-fashioned model, will have a competitive  advantage over the rest, incapable of imitating them.  

In the near future, I will continue discusing on this subject.

By Laura M. Gonzalez