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Open Innovation

Prof. Se-Joon Hong

Open Innovation
 Traditionally, many companies are enslaved by
the old paradigm  closed innovation
 Closed innovation embraces a strategy of vertical
integration and exclusive control
 For most of the 20th century, the old paradigm
worked pretty well

Open Innovation
 However, the world is changing
 Information now flows cheaply and instantaneously
over the Internet; smart people are more widely
dispersed and mobile but more closely connected
 Ideas bubble up in all kinds of organizations
 Isolationism stifles innovation
 Many companies suffer from “Not-invented-here”
syndrome: not realizing the full potential in tapping
outside ideas

Open Innovation
 In this world of abundant knowledge,
companies must be nimble at “open innovation”
 Accessing and exploiting outside knowledge while
liberating their own internal expertise for others
 Not only can they benefit from ideas they harvest
from outside, but also they can profit from sharing
their ideas with others, even competitors
 Lucent vs. Cisco: Lucent inherited the wealth of Bell
Lab expertise, but Cisco is not doing much internal
research of its own (open innovation)
Open Innovation
 Not all smart people work for you
 Companies are opening their innovation borders to
vendors, customers and even competitors
 Businesses are increasing the import and export of
novel ideas

Open Innovation
 Lego (Mindstorms)
 XC2V (Local Motors)
 Open Source Software
Work Closely with Customers to
Develop New Solutions (LEGO)
 Companies do more to involve customers in their
innovation processes
 LEGO had great success in letting customers create
designs (LEGO Ambassadors): allowed customers to build
various LEGO designs (LEGO factory, modular buildings)
 LEGO Mindstorms: LEGO opened up its software so that
anyone could modify it and watched what customers
decided to create  radically open approach
 An entire middle school curriculum was developed in the U.S. to
teach children robotics, using LEGOs  LEGO products have given
rise to a services industry focused on middle school science

Open Innovation
 Importing ideas
 Internal idea sourcing
 Exporting ideas

Benefits of Open Innovation
 Improves the pace, cost, and quality of innovation
 Importing new ideas multiplies innovation building
blocks (i.e. ideas and expertise)
 Exporting ideas is a good way to raise cash and to
reveal an innovation’s true worth
 Exporting and importing ideas clarifies what you
can do best
 Open innovation lets companies set realistic market
values for their own ideas, helping them to better define
their core competencies

Importing New Ideas:
Multiplying Innovation Ideas
 Companies can have more ideas to choose
from and different kinds of expertise available
to them, then the cost, quality, and speed of
innovation improve
 Companies that collaborate with outsiders on their
R&D reap a higher percentage of total sales from
new products than those that don’t

The Innovation Broker

 An innovation marketplace founded in 2001
 Connects “Seeker” firms posting scientific problems
(“Challenges”) with external “Solvers” who
submitted solutions  “eBay of innovations”
 Broadcast search problem-solving approach
 Seekers that judged solutions acceptable reward the
Solvers with cash prizes (up to USD 1 million) and
assume the associated intellectual property rights
 Seekers include commercial, government, and non-
profit organizations such as P&G, Eli Lilly, Janssen,
and the Rockefeller Foundation
 Provides a consultancy (brokering) service to
both its clients (seekers) and solvers
 Helps clients identify challenges appropriate for
posting on its network of solvers, estimate the reward
fee based on the complexity of the challenge
 Handles legal issues (e.g. intellectual property rights)
 Helps its network of solvers by providing, feedback,
legal frameworks, a variety of tools for group work,
community functionality, discussion groups, joint-
authoring tools,…
 Assures confidentiality/anonymity
 So far, more than over 2,000 challenges in many
scientific domains were posted
 More than 62,000 solutions were submitted
 Had attracted more than 380,000 solvers from nearly
200 countries
 More than USD 50 million of rewards
 Anyone can register as a potential solver
 Many solvers hold PhDs, representing diverse fields,
including academics, students, consultants, retirees,…

Customer Production: Threadless
 A Chicago-based fashion company established in 2000
 Selling T-shirts with colorful graphics
 T-shirts: typically hit or miss; need to successfully identify fast-
changing trends
 None of Threadless’ hundreds of products has ever failed:
How?  relies on community of customers (hobbyists,
professional graphic designers,…)
 Customers design, inspect and approve all designs
 Threadless can exploit a pool of talent and ideas
 Threadless manufacture only those designs that earn the
necessary number of preorders from customers  ensuring
each product’s success
Threadless (2)
 Each week on the Threadless website, customers can
evaluate approx. 1,000 new submissions on a 5-point
 On the average, each design is rated by 1,500 people
 Customers show their intentions to buy a submission so that
Threadless can decide which products should be developed and
 The company produces about 10 new designs each week, and
creators of those submissions receive financial rewards
 The community is thriving with more than 2 million members
 Extended its biz model to other items (ties, polo shirts, wall
graphics, etc.)
Limitations of
Conventional Market Research
 Companies typically rely on focus group studies that have
severe limitations
 Results from focus groups are not reliable indicators of the
reactions of the broader population
 Lack realism because consumers are often given only verbal
descriptions of concepts of a product
 Do not measure people’s real purchasing behavior (only attitudes
or intentions), thus do not provide quantitative estimates of sales
and profitability
 Test marketing can provide a more reliable measure, but it is
extremely expensive, time consuming and subject to a high
level of noise from competitors’ activities and other sources
Limitations of
Conventional Market Research
 Conventional market research does not often
provide reliable, complete, and timely
 As a result, companies develop new products
basically by revising their existing offerings
 Places companies in the persistent danger of missing
important trend changes
 Prevents companies from developing products that
are truly innovative
Benefits of Threadless Model
 Provides access to ideas for new product designs
 Particularly effective for companies targeting either
specialized customer segments or volatile markets with
fast-changing trends
 No need to identify the segment: Helps convert market
research expenditures directly into sales
 Helps firms avoid product failures
 Can determine the volume necessary to produce an item
for a given sales price (through preorders)
 If not enough preorders: can scrap the design before the
company makes any major investments in final
development, manufacturing, marketing, and sales
Open Source, Crowdsourcing Automobile Company

Peer (or Customer) Production
 The growing accessibility of information
 Tools required to collaborate, create value, and
compete are available at everybody’s fingertips
 Liberate people to participate in innovation and
wealth creation
 Peer production: when masses of people and
firms collaborate openly to drive innovation
 YouTube, Linux, Twitter, App Store, …

The Key Impacts of
Peer Production for Business
 Harnessing external talents
 Today, the speed and complexity of change is too
fast for a company to create all the innovations
 More people and partners develop solutions faster,
cheaper and better than ever
 Boosting demand for complementary offerings
 Services, support, applications,…
 Building a new ecosystem

Collective Customer Production
 All collective peer production practices must
 Full disclosure of the entire process, from initial
customer inputs to final product commercialization
 However, companies must make important
decision about tradeoffs (what-to-do and what-
 Companies must always combine the collective input
of their customers with their internal knowledge of
the market
Collective Customer Production
 Companies should be able to discard some
customers’ ideas
 The quality of the design
 Technical constraints, manufacturing costs
 Legal considerations
 Contribution to the existing assortment of products

Crowd Funding: Kickstarter

What is Kickstarter?
 Sell creative ideas
 Ask for funding from pledgers
 The seller maintains complete control of his/her
project’s direction
 After a designated amount has been raised, the
money is sent out and the project is launched!

Tiered Incentives
Examples of Kickstarter Projects
 Pebble e-paper watch

 Oculus
 Hover Board (

 LUMO back
Internal Idea Sourcing
 Organizations will need to institutionalize
innovation as a deep value to get a steady flow
of rule-changing ideas (Gary Hamel)
 Many companies still waste a substantial share of
their employees’ imagination
 The cheapest way to get more ideas into the
innovation is to ask for them
 Raise the ratio of innovators to the total number of
employees: make many employees regard
themselves as innovators
Example: W.L. Gore
 Signature product: Gore-Tex
 A single core belief: Innovation can come from
anyone, anywhere
 Every employee (“associate”) can allocate 10% of
his/her time to dreaming up new applications for the
company’s materials
 W.L. Gore’s innovation democracy has propelled the
company into areas as diverse as fuel cells, medical
devices, sealants, dental floss, and guitar strings

IT-Driven Innovation:
IBM’s Innovation Jam
 IBM research labs are pumping out brilliant
technologies ranging from weather forecasting
technology to real time translation technology
 IBM wants to find some novel ways to commercialize
these ideas successfully, a challenge that IBM hadn’t
always efficiently met
 Using more than 300,000 capable employees, IBM
wants to find faster ways to move products based
on new technology to market
 The idea of a “Jam” to promote innovation
IBM’s Innovation Jam
 Innovation Jam took place in two three-day
sessions in 2006
 More than 150,000 participants (employees, family
members, biz partners, clients from 67 companies,
university teachers) from 104 countries
 The largest online brainstorming ever
 The Jam was successful: it discovered new ways of using
IBM innovative technologies
 Biz created from the Jam: smart health care payment
system, intelligent utility networks, “Big Green”
innovations, electronic health record system, 3-D
IBM’s Innovation Jam
 IBM suffered from many difficulties too
 Ideas didn’t get refined through continual, respectful
dialogue (e.g., body language skills don’t apply, inevitably
had to leave the conversation for long time)
 Many ideas were completely impractical (lots of garbage)
 Guiding the conversations toward a focus on a few
thoughts was even more difficult
 The Jam is fundamentally a collecting ideas that will later
be evaluated slowly  rarely generates rapid answers
and thrills that some online experiences can produce
 However, the Jam’s value was in bringing many ideas
Exporting Ideas: Raising Cash and
Keeping Talent
 Royalties from patents  cash $$$
 Schlumberger sells innovative ideas pertaining to oil field
services (e.g., oil drilling, data collection) to both
customers and competitors
 Exporting ideas adds urgency to the innovative
enterprise (act fast on promising ideas, otherwise
risk seeing them offered to outsiders)

Exporting ideas: Revealing an
innovation’s true worth
 Companies can look at their innovation through
market-hardened eyes
 Eli Lilly routinely offers licenses for some compounds
under development and finds out whether anyone
wants it: if none, no further investment is warranted
 Especially when the therapeutic and business value
of the drugs is still unclear

Exporting and Importing Ideas
 Helps companies clarify what they do best
 Companies often delude themselves into thinking
that their core capability is broader than it really is
 Boeing found that their true competitive advantage
was not in manufacturing but in systems integration

Open Innovation Risks
 Some companies lose opportunities by sharing
their innovations with current or potential
 Xerox virtually gave away a stream of innovations
(computer mouse, GUI, laser printer,…)

Although the Dangers of Sharing
Innovations are Real
 The greatest danger lies not in the transfer of
the innovation but in the structure of the deal
 At the right price, an innovator can make big
money and build mutually beneficial
relationships by sharing an innovation to other

Although the Dangers of Sharing
Innovations are Real
 Selling or renting innovations poses fewer
competitive risks than most people think
 Innovation transfers take time: the original innovator
continues to go ahead while the buyers need to
understand and customize the innovations
 Buyers may never capture the full value of the
innovation transfers
 Managers tend to underestimate the strengths of
suitable substitutes (IBM vs. Compaq)

IBM and the Attack of the Clones
 In 1980, IBM was in a hurry to introduce a personal
computer (PC). It used off-the-shelf components such
as Intel microprocessors and MS DOS
 IBM believed that its proprietary basic input/output
system (BIOS) would protect the computer from being
copied by competitors, because the BIOS was
 However, Compaq reverse engineered the BIOS in a
matter of months without violating the copyright, and
quickly introduced a computer that behaved like an IBM
computer in every way. And other clones were quick to
 Copyright protected the written lines of code, not the functions
those codes produced
The Myths of Innovation

Professor Se-Joon Hong

Myth #1: The Eureka Myth
 Many people believe that the sudden flash of
insight define the process of innovation
 That’s why companies are drawn to big ideation events
 However, the truth is far different  Innovation is 5%
inspiration and 95% perspiration
 Innovation as a chain of activities—from generating new
ideas through to commercializing them: the latter stages
of the process (idea conversion & diffusion) are the most
time consuming and where problems occur
 Many companies are relatively good at generating new
ideas, the bottle neck in the innovation process occurs a
lot further down the pipeline
Innovation Value Chain
 Idea generation
 Collaboration within units
 Collaboration across units
 Collaboration with outside parties
 Idea conversion
 Screening and funding of new ideas
 Developing ideas into viable products, services or
 Idea diffusion
 Spreading developed ideas within and outside the

Myth#1: The Eureka Myth
 Companies underestimate the amount of work
needed after the workshops (Example: IBM’s
innovation Jam)
 preliminary sorting, scoring and giving back
feedback take a huge amount of effort/time; many
experts and category owners have to be involved

Myth#1: The Eureka Myth
 What should you do?
 Clearly understand what problem you’re facing
 If you think it is a lack of ideas, use an ideation
workshop; but be ready to invest a lot of time and effort
into the follow-up work
 Find the weakest links in the innovation value chain and
correct them!
 Successful innovation programs typically take many years
to bear fruit (P&G’s Connect + Develop initiative took
over 10 years)
 Unfortunately, many companies lack the continuity in
leadership needed to make a long-term commitment
Myth#2: Open Innovation Is
the Future
 Many companies believe a more open approach to
innovation is necessary, however
 There is no free lunch or offer
 The costs of open innovation are considerable, including
practical challenges in resolving intellectual property
ownership issues, lack of trust on both sides of the fence
and the operational costs involved in building an open
innovation capability
 Sometimes the insights provided by external sources may
not be useful for company-specific problems
 The time and effort involved into building external
networks should be significant
Myth#3: Rewards for Ideas
 How to structure rewards for ideas?
 Myth: We have to offer incentives (extrinsic
incentives such as money) so people put in extra
effort  It may not always necessarily true

Myth#3: Rewards for Ideas
 Extrinsic rewards are usually secondary
 The more powerful motivators are typically “social”
factors, such as the recognition and status that is
conferred on those who do well
 “Personal” factors such as the intrinsic pleasure from
generating ideas
 Individuals even view the offer of reward for an
enjoyable task as an attempt to control their behavior,
which hence undermines their intrinsic interest and
creative performance
 Intrinsic motivation is especially likely to suffer when the
incentives are large

Myth#4: Innovation is Risky
 Yes, some innovations are radical and risky
(e.g. fusion power), but it’s not necessarily
always true
 Seoul Milk
 Simply added manufacturing date (sales revenue
increased by 25%)
 Liberation Wrapper