by Peter Merrill

Open market innovation intrigues people because it appears to run counter to accepted business practices. It discounts secrecy, recognizes we lack knowledge in our own organizations and depends on ideas from outside for success.

In 1996, James Moore wrote a book called The Death of Competition. In it, Moore postulated that in the coming years, successful organizations would not be the ones that stand alone, but instead would be the ones that rely on collaboration with others to succeed.1

We arrived in that position during the last decade, and now organizations such as Proctor and Gamble, IBM and the Lego Group are proudly saying their innovation success has come from partnering with outside organizations and treating innovation as a global activity.

The innovation process involves converting new knowledge into new products and services that enable customers to carry out activities in new and better ways. The principle on which open innovation is founded is that there is more knowledge outside the box than inside. Knowledge is the fuel of innovation, and the more knowledge you gain, the more successful you will be at innovating.

We are now in a period of rapid innovation, and not for the first time in history. At times like this, the lifetime of new knowledge shrinks dramatically, and we need a process to acquire new knowledge more rapidly.

It’s crucial to recognize you don’t have all the smart people working for you, so you must go and find them. That may involve looking in the same town, elsewhere in the country or even on the other side of the world. With today’s communication tools, your reach is as long as you want it to be.

Knowing what’s needed

Many people think innovation starts with finding an answer to a problem, but in truth it begins with finding an unfulfilled need. Open innovation begins with finding your customer’s pain, and this means taking our first step out of the box.

You won’t find these needs by asking customers to complete surveys; you need to talk to them because the bandwidth of a conversation is far greater than a piece of paper or something on a screen.

Open networking is a vital technique in open innovation because you don’t just talk to the customer; you also talk to the customer’s customer and to other industries. You need that second degree of separation to find real opportunities.

Social change is what creates new opportunity, and you need to realize change doesn’t only come from down the street; it also comes from across the globe. The market, population and planet are changing. You won’t find the effect of that change by sitting in a lab. You must get out into the real world through open networking.

I started my career in the R&D department of a major chemical corporation. I remember being intimidated—along with the other engineering types—by the smooth talk of the salespeople at our organization. They were a different breed.

It’s a fatal error, however, for organizations to separate engineers and marketers just because they are different kinds of people. In fact, the closer you bring together market research and product research, the more effective the organization will be in answering market needs with new ideas.

What’s the answer?

Having found the need takes us to how to answer the need. Traditional R&D does this very badly, and I can honestly say that in a past life, I was part of that problem. This was verified by research conducted by IBM, the results of which are the sources of new ideas, summarized in Table 1.2

It’s interesting how well customers, business partners and employees score on this chart. But you need external stimulus to generate ideas. Unfortunately, traditional R&D works very much in a box, and product researchers rarely talk to market researchers.

So how do you get out of the box? Perhaps one of the best stories on this comes from Proctor & Gamble. A.G. Lafley became the organization’s CEO in 2002 and saw R&D taking as many as five years to get an idea to market because of obsessions with secrecy, drawn-out legal agreements and obsessive detail in financial pacts.

The new Proctor & Gamble would have none of that. Lafley recognized speed was essential, so he helped create the organization’s connect-and-develop strategy.

One example of the new approach was a change to the snack chip Pringles. The stacked snack is a straightforward product and perhaps a little boring. But the company thought about fortune cookies, which also are very basic and yet are an essential part of any Chinese meal.

Eventually, Proctor & Gamble realized it’s the message on the fortune cookie that matters. This is a great example of a conceptual solution—taking a solution from someone else’s world and translating it to your own.

The challenge for Proctor & Gamble, having found the concept, was how to find a working solution for the problem of how to put words on a Pringle. The old Proctor & Gamble would have spent five years developing the technology. The new version of the organization took a different approach, saying, "Somebody out there already has the technology. Let’s find it."

In a matter of months, they found a baker in Bologna, Italy, who had the technology and came to an agreement that enabled Proctor & Gamble to get to market in a fraction of the time it would have previously taken.

In that example, the organization was able to find a nearly complete working solution. But open innovation also includes the development of working solutions. Open networking recognizes that breakthroughs occur at intersections of bodies of knowledge, which is where new worlds connect.

Mirror, mirror

While building an organization, it’s easy to fall into the "mirror trap." In that situation, organizations recruit people that mirror the people they already have, and diversity is lost. Diversity is essential for innovation. Open innovation can help overcome the problem by enabling you to recreate diversity at your organizations.

It’s similar to a think-tank strategy. You mix people with varied backgrounds and allow them to spark off each other. In a small organization, this can be done fairly easily by collaborating with customers and suppliers. But now, larger organizations are using web-based networking to find their solutions. The best known of these web-based methods is InnoCentive created by Eli Lilly, but there are many others.

As you develop global suppliers, networking with them can be more challenging. But that doesn’t mean they should be ignored. They know the component or the service they provide to you far better than you do. At the product development stage, their involvement in the concept and the development ensures you understand the capability of their contribution.

Engaging your customer in the development stage is something often overlooked or even avoided. The concern is that they will give the idea to the competition. This is why speed of execution is vital in the development stage. That way, the competition will only see your heels instead of overtaking you.

Trust exercise

The word "collaboration" arises often in conversations about open innovation, so it’s only natural to discuss trust, which comes from understanding the other party. Too often, organizations don’t take time to do this. They jump straight into nondisclosure agreements and start arguing financial percentages on something that doesn’t even exist.

Instead, spend this time understanding how you and your partner operate by asking a few questions:

How does it arrive at its decisions?
How is it structured?
How does it behave?
What kind of culture does it have?
How does its R&D work?
Is it high risk or highly bureaucratic?
How closely is the management team connected to its R&D?

Are its leaders just salespeople who talk a good game, or do they really understand their business?

You don’t need positive answers to all of these questions, but you do need to recognize and accept each other’s weaknesses. There is an old saying: Marry in haste, and repent at leisure. In this situation, that means understanding the asset each party brings to the table and respecting each other’s assets.

Good relationships are based on trust and respect. Partnerships also require respect. Too many large organizations bully their small suppliers or ignore their suggestions. Your external network must show that all people are created equally and all ideas are respected.

Your network will not happen by accident. You need a coordinator who will hold it together and keep people engaged. You need tools and techniques, such as virtual conferencing, a shared website and periodic face-to-face meetings. You also must regularly analyze your network membership to maintain diversity and ensure contribution.

In building these external relationships, you also must remember that different people look for different rewards. A great example is the Linux open source software, which rewards software developers by allowing them to be a part of something bigger. This is an example of how, for creative people, recognition is more important than financial reward.

The remaining concern for most people is the harrowing thought of giving all your ideas away. There are three key components in your strategy that mitigate this risk:

Your innovation strategy should initially aim at the unfulfilled needs of your existing customers—in other words, people with whom you have an existing relationship.
When you select a preferred solution, focus on solutions that use the skills and abilities that are core to your business. Competitors can steal your idea. It’s much harder for them to steal your people and their competencies.
Operate your innovation system by ensuring your concept work and proof of concept are fully formed before you get into the development phase. You don’t want to be engaged in expensive and time-wasting rework after your new product decision.

Go outside

Much of what I described may already be happening at your organization. But lurking within it may be a silent enemy called "not invented here." In other words, your organization is loath to rely on anything that wasn’t developed in-house. Proctor & Gamble overcame this by saying "proudly found elsewhere."

The majority of innovation is coming from small and mid-sized entrepreneurial companies that start as a result of someone seeing an opportunity and developing a radical solution. Whether you are a small, medium or large enterprise, it is essential to capture that external knowledge to help create new offerings.

References

James F. Moore, The Death of Competition, Harper Business, 1996.
IBM, "Expanding the Innovation Horizon: The Global CEO Study 2006," March 1, 2006.