Open innovation

In the world where we live everything must be faster, better and newer. Companies have to innovate and develop products/services faster then ever. With this challenge companies need to think different.

Open innovation is a new way of integrating customers during the research and design period of the firm. This picture below is a simple example of how open innovation works. Because of the new method, firms can choice between the traditional approaches or the new open approaches. The differences between these methods are showed in the table below.

Traditional innovation

Open innovation

Only intern knowledge

Intern and extern knowledge

To take advantage of R&D, we have to discover, develop and deliver with ourselves

External R&D may have value for us

If we discover something, we can be the first on the market

We don’t attempt to do the original research in order to profit from it.

The company first on the market with an innovation will win

A better business model, is better than be the first on the market

With the must and best ideas we will win

Combine internal and external ideas and we will win

Shield the innovation process so that competition doesn’t benefit from our ideas

We should profit from others’ use of our innovation process

The difference is about internal and external, the reasons of this change is because the higher education level of the population and the increased communication possibilities. Open innovation is about external influence, because it is not possible to have all the smart people inside. For open innovation you need customers with high expertise and strong and unique needs, like lead users. This group of customers are the first inline of the adoption lifecycle.

The advantages of open innovation are reducing the risk of innovation, because you bring exactly what the customers wants. The ideas can come from anywhere and anyone, so all the opinions can be heard. The total cost of the product can be decreased because of the lower operating costs and the R&D. But maybe the most important advantage is the relationship with the customer. Because with open innovation, the company must fully trust the customer. But a new method doesn’t have only advantages. The disadvantages of open innovation are losing control about the innovation and the step from traditional to open innovation is complex and sometimes anxious. It is complex and anxious, because the new method doesn’t give guarantee for the future.

There are three strategies for reducing the risks of new product development, according to the paper of S.Ogawa and Frank T. Piller (Reducing the Risks of New Product Management, MIT Sloan Management Review, 2006). These strategies create better ideas than the traditional innovation. But they are not perfect. Below we will discuss the three strategies and also why they are criticized.

The first one is ‘postponement’: new products are developed by manufactories based on market research input. After this there will be a prefabrication of (some) components. The company tries to access better market information based on market research input. This strategy has a mass distribution.

The second one is ‘mass customization’: the product development and customization are done by the manufacturer but the customer code-signs during the process. Individual customers place the orders so there is a custom (on-demand) manufacturing and a custom distribution.

These two strategies have three disadvantages: it does require interactions with individual customers because of the individual needs, it needs an investment in flexible manufacturing equipment and it also needs an “elicitation system” where customers can rate the products.

Because of these disadvantages there is the third and final strategy: ‘collective customer commitment’. This is a mix between “postponement” and “mass customization”. The development of new product designs is done by some (expert) customers. The following evaluation and refinement of design are done by the manufacturer and customer community. There will be a presentation of selected design concepts and solicitation of commitment from potential customers. After this a (mass) production will follow, but only if minimum lot size is presold. This results in a mass distribution. For example lays: We believe that this is an example of collective customer commitment because the development of new product design is done by customers. They eventually choose their favourite flavour so there is also a guaranteed amount of sales. The flavour that wins the contest will be mass distributed for (at least) one year.

This strategy has some main benefits: (a) The production cycle only starts after the consumers have shown their real commitment. Therefore product flops can be reduced. (b) The manufacturers don’t have to produce pre-fabricates. (c) It doesn’t require interactions with individual costumers or it doesn’t have to run the whole production for one product.

So is open innovation really a faster and easier way to innovate and is knowledge sharing, networking and identifying customer needs a method for faster, easier and better innovation or is it a standard?

The following videos give an idea about open innovation. One video is about companies that use open innovation and the other video is about a company that helps other companies with open innovation.

Kind regards,

Nicole Deurholt, Sebastiaan van Veen and Erwin Westveer

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