An in-depth breakdown of the open innovation paradigm.

With more than three years of experience helping corporations scale their innovation strategies, we have learned a great deal from each company’s fascinating and unique use cases.  Through their innovation journey, corporations have taught us a lot about current corporate innovation trends. And thus, have helped us shape our vision, one that is driven by the market’s needs.

Meanwhile, we ensure  these findings and trends resonate with the findings of research and management science.

This article aims to provide everyone with a precise yet easy handbook to travel through Open Innovation, which is not always crystal clear – even though we hear about this concept often. You will find all the references at the end of the article. 

If you are short on time, you can jump directly to the Takeaway Section.

The History of Open Innovation

Open Innovation is a term coined by Henry Chesbrough in 2003 in his book Open Innovation. Henry Chesbrough is an innovation thought leader and Director of the Garwood Center for Corporate Innovation at Berkeley Haas. His publication was dedicated to researchers and managers and appeared to be helpful to both worlds. 

Indeed, since then:

  • The number of times “Open Innovation” has been searched on Google rose exponentially. 
  • Thousands of research papers have been written to explore further this new paradigm.
  • Displaying Open Innovation initiatives has become a strong trend among corporations.

However, this situation also brought the need to clarify the concept, and the need to get everyone to agree on the same definition. Therefore, Chesbrough along with his peers kept researching the concept and offered furthered definitions over time:

  • 2003 | Original definition: “Open Innovation means that valuable ideas can come from inside or outside the company and can go to market from inside or outside the company as well.”
  • 2006 | A new definition to help link the Open Innovation concept to existing research on Knowledge Access: “Open Innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively.”
  • 2014 | A new definition to help link the Open Innovation concept to existing research on R&D Spillovers: “Open Innovation is a distributed innovation process based on purposively manage knowledge flows across organizational boundaries, using pecuniary and non-pecuniary mechanisms in line with each organization’s business model.”
  • 2019 | A new definition to help link the Open Innovation concept to concrete results from the last decade: “In order to move beyond simply celebrating Open Innovation’s successes, we can start by considering some underlying conditions that need to be satisfied. At its roots, Open Innovation is about generating, disseminating, and absorbing inflows and outflows of knowledge”

Yes, these different definitions can be confusing to the business world despite their deep insights. Having a deeper understanding of the genuine concepts and its designs is a short-cut to benefiting from its business opportunities and transformation potential. Our world is undergoing profound change, and we believe large firms must have the best tools in hand to shed their old skins.

Gaining Some Perspective: What Was There Before the Open Innovation Paradigm?

To have a precise understanding of the benefits of Open Innovation, one must know its historical roots. Before the Open Innovation Paradigm, we had the Closed Innovation Paradigm , as Chesbrough named it.

The shift from the Closed to the Open Innovation Paradigm is actually directly correlated to the evolution of the knowledge landscape. Indeed, innovation was defined as, the development and commercialization of new or improved products, processes or services, which are correlated to accessing useful knowledge. 

The Historian Alfred Chandler documented that the 20th-century knowledge landscape was centrally organized into strong Research & Development (R&D) functions of industry leaders. Research scientists would explore new potentials and their outputs once picked by development engineers would be turned into products. Unutilized outputs could wait for years, in development opportunities portfolios, with no fear of significant leakage out of the company, to a startup or another rival company.

These R&D facilities were actually hermetic, largely self-contained, insulated from universities and small enterprises, and disconnected from governments. R&D departments were strategic for businesses and would receive important business investment. Innovation was then generated through deep vertical integration: the company would ensure the whole value chain of any new products, process or services.

Understanding the Shift: Why and When did the Knowledge Landscape Change?

In 2003, Chesbrough identifies four erosion factors turning obsolete the logic underlying the Closed Innovation Paradigm at the end of the 20th century.

  1. The increasing availability and mobility of skilled workers:
    Higher education programs flourished after World War II and greatly increased the number of highly-skilled workers. In addition, mobility on the labor market became common. This led to a diffusion of knowledge across industry leaders.
  2. The expansion of Venture Capital:
    After the 1980s, Venture Capital investment firms developed and allowed new actors to emerge.
  3. The new external options for unused technologies:
    Due to the first two factors, an innovation inventor was now likely to leave the company and develop a product out of it thanks to new access to skilled people and funding. Waiting for the development team to use his invention was not the only option anymore.
  4. The increasing capability of external suppliers:
    The diffusion of knowledge in companies of all sizes reduced the need for industry leaders to develop the whole value chain of innovation, as they could now rely on better-skilled suppliers. Hence, the time to market could be lowered and pressure emerged to utilize and activate outputs explored by research teams and unused by development teams.

In 2014, Chesbrough points out a fifth erosion factor: the development of the internet, making knowledge access tremendously easier.

Introducing the Concept: How Have These Factors Driven Us to the Open Innovation Paradigm?

First, deep vertical integration with relatively long time to market became obsolete in this new era, as an idea or a technology internally kept would leak out to the broader environment over time. 

Second, these trends also created multiple new innovation opportunities, available outside the firm. Therefore, a firm can now create innovations for both internal and external use, and the firm can access innovations from the outside as well as from within. Chesbrough points out a rearranged landscape of knowledge, from the tall towers of central R&D facilities to variegated pools of vital knowledge distributed across the landscape. These pools include: customers, suppliers, universities, national labs, consortia, consultants, and startups.

In this new paradigm, companies must then “structure themselves to leverage these distributed pools instead of ignoring them in the pursuit of their internal R&D agendas” (2003).

In the Closed Innovation Paradigm, existing research in management of innovation judged that the research spillovers could not be manageable. Indeed, exploration outputs could not be anticipated neither in nature or timely, contrary to development projects that were designed into a precise constraint frames. 

However, in the Open Innovation Paradigm, companies were now able to:

  • Leverage internal knowledge through external commercialization processes. This is Outbound Open Innovation.
  • Leverage external knowledge into their own innovation activities thanks to dedicated processes. This is Inbound Open Innovation.
  • Practice both. This is Coupled Open Innovation.

That’s why Chesbrough redefined Open Innovation in 2014 as “a distributed innovation process based on purposively managed knowledge flows across organizational boundaries, using pecuniary and non-pecuniary mechanisms in line with the organization’s business model.”

Diving into the Concept: What are the Benefits and Mechanisms of Open Innovation for Firms?

Open Innovation invites companies to embrace the abundance of knowledge they are evolving in. The concept brings out that both “external ideas and external paths to market become as important as internal ideas and paths to market”.

This abundance of knowledge enables companies to:

  • Learn and access knowledge faster
  • Adapt their strategies more rapidly
  • Switch to iterative ways of developing novelties, as customers are easily accessible
  • Spin-off unused new technologies and becomes inspired with potential developments at lower costs.

To activate those benefits, companies must launch some mechanisms, aiming to “increase the metabolic rate at which they access, digest, and utilize knowledge”. To that matter, keep in mind that “companies cannot treat their knowledge as static, they must treat it as fundamentally dynamic” (2003).

Here are the mechanisms Chesbrough lists to help companies manage purposive inflows and outflows of knowledge:

  • Sourcing
  • Inlicencing Intellectual Property (IP)
  • University research program
  • Funding startups companies
  • Collaborating with intermediaries, suppliers, customers
  • Utilizing NDA agreements
  • Crowdsourcing
  • Competitions and tournaments
  • Communities
  • Spin-in / Spin-back new technologies
  • Outlicencing IP and technologies
  • Donating IP and technologies
  • Spin-outs
  • Corporate venture capital
  • Corporate incubators
  • Joint-ventures and strategic alliances
  • Ecosystems
  • Consortia

These mechanisms bring a new role to R&D functions that Chesbrough names “knowledge brokering” (2003). It’s not only about generating knowledge anymore, it is also about managing knowledge flows and disseminating them into organizational silos. 

This point is crucial as Open Innovation processes aim to cover all steps from ideation to commercialization, so as to make sure to both create and capture value from ideas and technologies. This notion of capturing innovation value has not been applied often in the corporate world according to Chesbrough’s results. This is why his last book insists on the three facets of Open Innovation:

  • Generation
  • Dissemination
  • Absorption
The Three Facets of Innovation

Key Takeaways: Here is What You Need to Remember 

  • Open Innovation is a new paradigm directly linked to the evolution of the knowledge landscape of the 21th Century.
  • The knowledge landscape has shifted in the past 30 years because of five erosion factors, from centralized R&D facilities to variegated pools of knowledge both inside and outside the company: 
    • the increase availability and mobility of skilled workers
    • the increase of available funds with Venture Capital expansion
    • the emergence of new external options for unused technologies
    • the increasing capabilities of external suppliers
    • the development of the internet
  • Against this new background, deep vertical integration was not the best strategy for innovation anymore as new strategic knowledge was now available externally for firms.
  • While management science had judged so far that the unused R&D findings where not manageable, the Open Innovation Paradigm proves to work in the opposite and defines itself accordingly as a “distributed innovation process based on purposively managed knowledge flows across organizational boundaries, using pecuniary and non-pecuniary mechanisms in line with the organization’s business model.”
  • There are three types of Open Innovation: Inbound Open Innovation, Outbound Open Innovation, Coupled Open Innovation
  • Open Innovation counts many benefits for a firm’s performance which can be activated through mechanisms working at increasing the metabolic rate of converting knowledge into value.
  • One must remember that innovation must not only be generated (from internal or external sources), but it must also be disseminated across internal silos, and absorbed into a business unit processes to create value for the company.