1. Applying open innovation where your
company needs it most
Amy Muller, Nate Hutchins and Miguel Cardoso Pinto
Amy Muller and Miguel he concept of open innovation, as first proposed by Henry Chesbrough in 2003,
Cardoso Pinto are Directors
and Nate Hutchins is a
Principal with Strategos, a
T suggested that companies would benefit by making ‘‘greater use of external ideas
and technologies in their own business, while letting their unused ideas be used by
other companies.’’ It was widely hailed as a powerful antidote to the ‘‘not-invented-here’’
global strategy and
syndrome that stifled innovation in many mature companies.[1] In theory, new ventures that
innovation consulting firm
would otherwise sit on a shelf and collect dust would flourish amidst open business models
(www.strategos.com), the
that reach beyond corporate boundaries to garner and commercialize valuable ideas,
Strategic Services division
technologies, insights, capabilities, and assets from consumers, experts, external partners,
of Innovaro.
and even competitors.
A decade later, though a number of pioneering companies successfully employed open
innovation business models, companies planning to jump on the bandwagon face some
daunting choices! Open innovation now includes customer input, crowd-sourcing,
open-source projects, patent acquisitions, soliciting external insights, supplier integration,
venture investing, and joint-development projects. The myriad options for engaging external
partners can be daunting, so leaders need a guide for getting started with open innovation
that matches the needs of their firm.
As a first step, we recommend looking at the output of your company’s innovation process at
each stage of development to consider which open innovation methods will best serve your
company’s growth objectives. Additionally, we suggest how companies should approach
new relationships with external partners to gain access to the expertise they seek, while also
protecting the company’s interests.
Assess your company’s innovation process
The process of innovation can be best understood as the identification of an opportunity and
the creation of its accompanying business model. As the opportunity progresses through
development, five key questions about the business model will be defined:
B Who is the target customer and what unarticulated needs do they possess related to our
business?
B What is the offering (product or service) and the underlying value proposition?
B How will the venture create sustainable competitive advantage?
B How must the value chain be configured to deliver the offering, and where will we play?
B How will the venture generate economic value for our company and key stakeholders?
Innovation processes are typically broken down into three stages during which the business
model elements are conceived and elaborated: idea-generation, idea-development, and
commercialization:
DOI 10.1108/10878571211209332 VOL. 40 NO. 2 2012, pp. 35-42, Q Emerald Group Publishing Limited, ISSN 1087-8572 j STRATEGY & LEADERSHIP j PAGE 35

2. 1. Idea-generation refers to the process of gathering insights about consumers and their
needs, and then generating or identifying potential ideas – new products, services, or
technologies – that address these insights.
2. Idea-development transforms the most promising of these ideas into market-ready
business opportunities by refining the five key business model elements.
3. Commercialization is the process of testing early hypotheses about the opportunity,
adjusting the business model based upon new insights, and scaling the opportunity for
launch.
The question for leaders is: In which of the three stages do your new ventures typically stall?
The goal is not to study each process, but rather to qualitatively evaluate the output at each
stage of development. Much as a savvy process engineer can pinpoint deficiencies in a
production line caused by excessive re-work and inventory, leaders can spot problem areas
in their innovation processes by noting where in development new opportunities typically
begin to unravel. Do incremental ideas support the value proposition? Are promising
innovations quickly elaborated in a disciplined way? Does your company invest significant
resources in developing a new idea, only to watch it fizzle when it hits the market?
Understanding where failure repeatedly occurs as new ventures progress through
development is the first step to identifying how open innovation can best support new
growth initiatives.
1. Idea-generation: sourcing insights and ideas
The goal of idea-generation is to assemble a rich portfolio of high quality ideas, both
incremental and radical. Considering the rate of attrition as ideas move through typical
development processes, this will require generating a large number of ideas from diverse
sources that span the entire business model. Furthermore, ideas are the ‘‘seed corn’’ from
which new ventures will be cultivated – in order to take root, they must connect with
customer needs, and also generate excitement among employees. If a company produces
only a limited quantity of new ideas, or only lackluster ideas that are predominantly
incremental in nature, the shortfall can be rectified by applying open innovation in two
distinct ways.
Gathering insights from external partners. First, look outside for new insights. Quality ideas
arise from quality insights: about your customers, your markets, your competencies and
assets, and even your own corporate orthodoxies. A wealth of compelling insights can be
gained by tapping the knowledge of external partners. One easy first step is to recruit a
variety of people from outside your company, industry, and expertise to participate in
‘‘insight sessions’’ to collect and synthesize observations about your markets, products, and
customers. Focus these sessions on an area that is of importance to your business, but allow
some free-ranging discussion. Include external people who bring depth of perspective to
the issue at hand: academics, technical experts, lead users, futurists, ethnographers,
extreme users, and others. As an alternative method, some companies can send their own
people into the field to capture customer insights. For example, Dow Corning has developed
a ground-breaking program, Citizen Service Corps, in which employee volunteers perform
service projects in emerging markets, while simultaneously gathering insights into
consumers’ needs and exploring new opportunities for innovation that would use the
company’s advanced silicone technologies. ‘‘Our team’s field experience working on
standards for affordable housing has led to deeper understanding of the needs,’’ explains
Chip Reeves, Director of Discovery at Dow Corning. ‘‘Communities and the non-profit
organizations serving them benefit from our team’s contributions, while our employees return
with enhanced leadership skills and first-hand insights into low-cost housing challenges in
emerging markets.’’
Scouting for ideas. Involving many diverse minds and voices in the ideation process is
crucial to ensuring a rich breadth of new ideas. Groups of individuals with similar values,
backgrounds, and perspectives will tend to produce similar ideas. Reaching beyond the
boundaries of the organization will yield a more diverse set of ideas, unencumbered by the
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3. ‘‘ The myriad options for engaging external partners can be
daunting, so leaders need a guide for getting started with
open innovation that matches the needs of their firm. ’’
company orthodoxies. A number of external sources are available to collect new ideas,
including academia, consumer groups, and the community at large. For example,
‘‘scouting’’ is an approach commonly employed to stay informed about the latest new ideas
and technologies. Siemen’s Technology to Business Center in Berkeley, California cultivates
relationships with scientists, venture capitalists, and entrepreneurs to learn about emerging
technologies.[2]
Starting a dialog with customers about their needs and suggestions via online forums is an
increasingly popular source of new ideas. A successful example occurred when Fiat
Automobiles launched a website to solicit ideas for the new car of the future. Users were
asked to think about broad issues such as traffic and life inside the car. More than 17,000
participants around the world submitted more than 11,000 ideas, and Fiat launched the Mio,
the world’s first crowd-sourced car, in 2010.[3] Other companies have found online
communities of inventors, designers, developers, and leading-edge users to be fertile
ground for new ideas. In 2007, Cisco launched an external innovation competition called the
I-Prize to help the company identify promising business platforms for future growth. More
than 2,500 innovators from 104 countries submitted 1,200 distinct ideas. The winning idea, a
sensor-enabled smart-electricity grid, was awarded a lucrative prize of $250,000.[4]
Finally, ideas can also be sourced via ‘‘idea scouts’’. Consultants at The Big Idea Group tap
its inventor and problem-solving network to find ideas addressing a particular theme, as
specified by the client. Specialist firms like Chaordix and Edison Nation serve as
crowd-sourcing facilitators, connecting at-large consumers looking to profit from their ideas
with companies possessing the means to bring them to market.
2. Looking outside for idea-development
Though it can be hard to come up with a blockbuster idea, especially one based on
compelling market insights, it’s even harder to navigate the long and often arduous process
of building a raw idea into a fully fleshed out business concept ready for market testing.
During idea-development, the key elements of the business model are elaborated – in
particular, the value proposition to the customer, how the offering is differentiated from the
competition, and how the venture will make money. Furthermore, the offering itself must be
molded and shaped from its original, nascent state into a commercially viable product or
service. Given competing priorities for time and resources within most organizations, it is not
uncommon for companies to abandon a new idea upon encountering its first major
roadblock. Alternatively, some ideas progress into complete business concepts, but fail to
achieve a level of differentiation sufficient to achieve sustainable competitive advantage in
the marketplace. Open innovation can be used to bolster new ideas and their associated
business models, and ready them for the true test of market acceptance during
commercialization.
Transactional development. The type of external relationship employed during
idea-development will vary depending on the extent of development needed for the
concept and its associated business model. Transactional solutions such as working
through an idea broker or acquiring a patent may be sufficient if the idea is only missing a
specific technical solution. For example, InnoCentive, a company that brokers open
innovation, posts ‘‘challenges’’ by member companies for solution by its worldwide network
of solvers. Winners of the challenges receive from $5,000 to $1 million depending on the
complexity of the problem. A more intensive approach is to employ external developer
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4. communities to support ongoing development. Software developer Salesforce.com relies on
an incubator with co-located external resources to accelerate the development of
applications that support its core technology platform. Developers work in a Salesforce.com
location and have access to the company’s technical and market guidance. In this way,
Salesforce.com can monitor and guide idea-development supported by external
developers.[5]
Venture-based development. Venture investing may be the most expeditious means to
support idea-development in industries that involve a high degree of research and
development that is widely distributed across universities and research centers. In the
technology sector, in-house venture funds that seek out and support promising external
innovations offer a way to leverage outside resources for idea-development, providing the
resources that motivate entrepreneurs to turn their raw ideas into market-ready
opportunities. Intel has successfully used this model since 1991 to incubate innovations
that support its strategic objectives.[6] Outside venture-capital firms can also be considered
an external source of capital for market-ready innovations.
Outsiders as intermediaries. There are intermediaries that can provide companies with
market-ready ideas as well as raw ideas. Professors Satish Nambisan and Mohanbir
Sawhney have termed these intermediaries ‘‘innovation capitalists.’’[7] The intermediaries,
such as Evergreen Innovation Partners and Ignite IP, will use their own network of inventors
or other external sources to search for ideas at a client’s request. In some deals, these
innovation capitalists acquire partial ownership of the idea and then develop it to the point
where its market potential can be validated.
Acquisitions. If competitive pressures require a quick response, acquiring a market-ready
idea in the form of a small company may be the preferred route. For example, Proctor
& Gamble paid $475 million for the small company that invented the SpinBrush electric tooth
brush, which became a critical and successful component of P&G’s oral-care business.[8]
High-tech companies commonly use such an approach to bolster their in-house innovation
efforts. As examples, Google acquired Android to bolster its innovation in wireless and
Microsoft acquired Skype to accelerate its innovation in communications.
3. Commercialization: leveraging partners for launch
During commercialization, major assumptions about the opportunity are tested, and the
business model is adjusted as needed before scaling up to a full product launch. At this
stage, faulty assumptions from earlier in development tend to surface, causing delays and
adding to the cost. Worse, some promising innovations get cancelled because of
deficiencies discovered in this last stage. At IBM, the old joke was ‘‘products don’t get
launched, they escape,’’[9] referring to the internal bureaucratic barriers in the path of
getting an idea to market. Many companies fail to consider the benefits of open innovation in
this last phase and focus only on owned or familiar technologies or methods to deliver the
innovation. However, opportunities for external involvement during commercialization span
the value chain – from sourcing and manufacturing, to marketing and distribution.
Accelerating commercialization. First, companies can leverage external partners to
streamline and accelerate commercialization. For example, although Apple is
‘‘ Quality ideas arise from quality insights: about your
customers, your markets, your competencies and assets, and
even your own corporate orthodoxies. A wealth of compelling
insights can be gained by tapping the knowledge of external
partners. ’’
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5. ‘‘ Reaching beyond the boundaries of the organization will yield
a more diverse set of ideas, unencumbered by the company
orthodoxies. ’’
well-regarded for its sleek product design and clever user interface, the company has also
been highly successful leveraging its supply base during commercialization. Apple focuses
on its competences in product design and user interface, while leaning heavily on its
supplier network to handle the complexities of the components within its successful
consumer product innovations. The original iPhone, for example, involved components from
at least 30 companies; even final assembly was outsourced. And for Apple, open innovation
extends to software as well. By allowing external developers to write Apps for the devices,
Apple leverages the entire user and developer community, rendering Apple’s devices more
valuable to users.
Airplane manufacturer Embraer provides another compelling example of using open
innovation to accelerate commercialization. In 1999, Embraer identified an unserved market
and decided to develop a new line of airplanes to seat 70 to 110 people. However, to get a
leg up on its competitors, it needed to build a new platform and develop and integrate the
latest technologies into the new airplane very quickly. To make it happen, Embraer increased
the number of strategic partners that would deliver ‘‘subsystems’’ composed of many
components, thus reducing the number of suppliers. As a result, only 30 months after the
project to build a new plane kicked off, Embraer 170 was ready to fly. Since then, Embraer
has engaged several external parties in designing and building its aircraft, reducing
production costs and time.
Partnering to capture value. Second, companies can leverage external partners to fill in
missing links in the value chain, that limit the company’s ability to capture value from the
innovation. By this point in development, there should be a clear line of sight to how the new
venture will create value for customers. However, the company may not have the required
complementary assets in place within the value chain to capture that value. Leveraging
external partners may require negotiating away some portion of that captured value, but the
alternative is that the new venture fails to capture any value at all! For example, Adobe
successfully used several external parties to help achieve widespread distribution of its
Portable Document Format (pdf). Adobe signed an agreement with Microsoft that bundled
Acrobat Reader into its operating system. Adobe also partnered with AOL, the dominant ISP
at the time, which distributed Acrobat Reader to its millions of users. Adobe provided Adobe
Flash Player technology to Google and Yahoo! to enhance search engine indexing of the
Flash file format (SWF) making Adobe Acrobat documents more relevant and enhancing the
search industry leaders’ reputation for being comprehensive.[10]
Licensing innovation. Third, companies can license valuable IP, if an opportunity requires
commercialization capabilities or assets that differ radically from the company’s core
businesses. Game maker Rovio has relied heavily on licensing to extend the ‘‘Angry Birds’’
brand, the company’s popular mobile gaming app, into books, movies, and toys. Such an
approach allows Rovio to rapidly monetize its brand via channels that would be difficult or
impossible for the company to access on its own.[11]
Open innovation: managing external relationships
Once the initial opportunities for open innovation are identified, leaders need to consider the
nature of the relationship with external partners. Relationship types vary from transactional to
a full out acquisition. As a generalization, the later in the development cycle that the
relationship is established, the more formal and structured that relationship will be.
Regardless of the type of relationship, companies engaged in open innovation must balance
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6. the need to promote openness in the relationship, while also taking proactive steps to protect
their own interests.
Transactions. During idea-generation, relationships with customers, consumers,
design/developer communities, and idea scouts are likely to be transactional.
Crowd-sourcing, soliciting customer input, idea-broker engagements, and other
idea-sourcing activities are usually one-off activities that don’t involve long-term
relationships. The ‘‘compensation’’ to the idea originator can range from payment for
services rendered (idea broker) to free products or coupons (customers) to cash prizes.
Outside experts participating in ideation sessions may be satisfied with simply the
opportunity to learn from others in the room. For participants in web-based crowd-sourcing
platforms, the intellectual challenge and identity that can be gained through their
interactions may be reward enough.
Partnering. In contrast, idea-development and commercialization tend to involve
company-to-company relationships in which each player has more ‘‘skin in the game.’’ As
such, the relationships tend to be more formal, such as joint ventures, alliances, licensing
agreements and partnerships. Some general guidelines are worth remembering:
B Forge a common understanding of the strategic objectives, while ensuring the existence
of the operational components that will sustain it – metrics, processes, organizational
structures and governance.
B Seek partners with core competences that effectively complement your own competence
gaps. The relationships will be more sustainable if the partners are able to benefit from the
unique ‘‘know-how’’ they bring to the table.[12]
B Carefully detail the boundaries of interaction – in terms of markets, communication
mechanisms, and information sharing – and explicitly define the eventual ownership of
any intellectual property generated through the relationship.[13]
B Put in place mechanisms to prevent any unintended intellectual property leakage.
B Be willing and ready to adjust the relationship – size, scope, ownership structure – in
response to changes in the market or technology changes.[14]
B Consider the endgame: At what point is the relationship intended to dissolve? What are
the scenarios that would lead to dissolution of the relationship, either amicably or
contentiously?[15]
Venture partners. Venture investing is an increasingly popular option for companies
engaged in open innovation. Small bets early on can help ensure your company is able to
capture value from a new technology down the road. The trick to venture investing is to find a
venture capital firm that you trust and that fully understands your business. A good venture
capital firm will be well-connected to a broad network of start-ups, will be able to protect your
interests in crafting an investment deal and will ensure your firm a voice in the direction of the
start-up as it steers through its growth phase.
Acquisition’s risks/benefits. Last but not least, companies can acquire pioneering
businesses that possess deeply coveted technologies or capabilities that are central to
the company’s strategy. The benefit of an acquisition is that it allows companies to obtain
‘‘ In the technology sector, in-house venture funds that seek out
and support promising external innovations offer a way to
leverage outside resources for idea-development, providing
the resources that motivate entrepreneurs to turn their raw
ideas into market-ready opportunities. ’’
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7. Exhibit 1 Where to aim open innovation
Idea-generation Idea-development Commercialization
You need to consider open Ideas arise from a very limited A large proportion of innovations Commercialization costs often
innovation if . . . number of novel insights are abandoned exceed forecasts
Ideas come only from a small New innovations fail to attain Commercialization takes too long
number of employees sustainable competitive and often misses the market
The same ideas continue to arise advantage window
Ideas are mostly incremental Day-to-day business crowds out Missing links in the value chain
Ideas fail to connect with time & resources for inhibit value capture
consumers or excite employees idea-development Commercialization relies on
Ideas are all focused on products Idea-development is a owned technologies and
and not on other aspects of the ‘‘part-time’’ effort and processes and existing
business model accountability is unclear distribution channels
Sources of open innovation Experts for insight sessions In-house venture-capital funds Integrating suppliers
Insight scouting and in-house incubators Licensing
Customers External venture capitalists Distribution partners
Inventor communities Innovation capitalists
Crowd-sourcing Small companies with innovative
Idea brokers products (acquisition)
market-ready products and services without having to invest time and resources in
development. However, an ‘‘open innovation’’ acquisition implies the same risks and
uncertainties and post-acquisition-integration tasks as any other acquisition. Furthermore, if
a company is just getting started with open innovation, an acquisition is a risk-laden first
step. Given the numerous options available to access and share expertise in this age of
openness, acquisition should be reserved as an option of last resort after other approaches
have been considered.
Making open innovation work for you
The benefits of open innovation are straight-forward: a company is no longer constrained by
its own ideas, technologies and innovations. Yet for executives schooled in closed business
models, embarking on an open innovation journey entails a major leap of faith. Fears of
losing control of key capabilities, assets and technologies that create value for the company
tend to constrain the open innovation dialogue before it begins. But the primary question is
not, ‘‘How can my company capture all the value from our innovations?’’ Rather, the first
question leaders should be asking is, ‘‘How can my company create significantly more value
by leveraging external partners to bring many more innovations to market?’’ (See Exhibit 1.)
Of course, concerns about protecting the company’s interests are valid. But adopting an
open-innovation approach does not require wholesale replacement of all your current
innovation efforts. Look critically at your innovation process, understand where your new
venture business models are weakest, and honestly assess the points at which open
innovation could add some needed spark. Start small; take deliberate baby steps. Over time
you will find that reaching outside the company can breathe new life into your innovation
pipeline.
Notes
1. Henry W. Chesbrough, ‘‘A better way to innovate,’’ Harvard Business Review, July 2003.
2. ‘‘Siemens Technology to Business Center,’’ www.ttb.siemens.com/new/en/ttb-index.html
3. ‘‘Fiat Mio, the world’s first crowdsourced car,’’ www.ideaconnection.com/open-innovation-success/
Fiat-Mio-the-World’s-First-Crowdsourced-Car-00273.html
4. Guido Jouret, ‘‘Inside Cisco’s search for the next big idea,’’ Harvard Business Review, September
2009.
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VOL. 40 NO. 2 2012 STRATEGY & LEADERSHIP PAGE 41

8. 5. Satish Nambisan and Mohanbir Sawhney, ‘‘A buyer’s guide to the innovation bazaar,’’ Harvard
Business Review, June 2007.
6. Henry W. Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from
Technology (Harvard Business Press, 2003)
7. Nambisan and Sawhney (2007), op. cit.
8. Ibid.
9. ‘‘2011 IBM CEO: how to live to be 100,’’ eetimes.com, August 5, 2011, www.eetimes.com/
electronics-news/4218534/IBM-CEO-How-to-live-to-100.
10. Bhaskar Chakravorti, ‘‘The new rules for bringing innovations to market,’’ Harvard Business Review,
March 2004.
11. Nick Wingfield, ‘‘‘Angry Birds’ spreads wings,’’ Wall Street Journal, August 10, 2011.
12. Amy Muller, Jorge Rufat-Latre, and Dave Jones, ‘‘Delivering on the promise of open innovation,’’
Strategy & Leadership, Volume 38, No. 6, November 20, 2010.
13. Ron S. Fortgang, David A. Lax, and James K. Sebenius, ‘‘Negotiating the spirit of the deal,’’ Harvard
Business Review, February 2003.
14. David Ernst and James Bamford, ‘‘Your alliances are too stable,’’ Harvard Business Review, June
2005.
15. Joel Bleeke and David Ernst, ‘‘Is your strategic alliance really a sale?,’’ Harvard Business Review,
January 1995.
Corresponding author
Amy Muller can be contacted at: amy.muller@strategos.com
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