The Competitive Advantage of Being Open

Let’s say you’re creating a business. So you hire the best people that you can. You take care when making those selections because each and every one of them is going to put you at a competitive advantage vis-à-vis others who are doing the same thing that you are.

Further, let’s posit that you have everyone on board. The development has commenced. Then the product is executed. And you have great success with your iWidget (a contemporary version of the tried-and-true widget, not the browser-oriented component of that name). You’ve made lots of money. Your team has created variants of the iWidget. Things are going swimmingly well, but then a competitor comes out with something different that begins to take the shine off of your product.

Chances are you are going to have your R&D and product development people work all the harder. Which, arguably, isn’t the right thing to do. A better response would be to look outside of your organization for a solution to the competitive challenge. But then there are all of those really bright people that you’ve hired, right? Anything out there can’t be as good as what you can have done inside because you have, you think, all of the smart ones.

Yes, a case of NIH: Not Invented Here.

Henry Chesbrough, adjunct professor at the Haas School of Business, University of California-Berkeley, and the executive director of the Center for Open Innovation at same, has been suggesting that people look outside for innovation for a number of years. He even wrote a landmark book on the subject titled Open Innovation: The New Imperative (Harvard Business School Press; 2003). Note how in the subtitle he calls it something essential, not optional, an imperative not a suggestion.

But he understands the reticence.

“The root of not-invented-here behavior,” he says, “is usually one of success. A company had tremendous success out of their internal R&D, and here comes this guy Chesbrough who says you’ve got to make greater use of external R&D.”

On the one hand you, as the senior manager in the organization, might resist because of all of those smart, talented people you’ve hired. After all, they’re the best and the brightest. The smart talented people, the internal R&D resource, might resist because they’re the ones who are supposed to be finding the answers to the problems, not someone from outside the company.

So does this mean that open innovation—in effect the crowd sourcing of ideas, the use of the wisdom of crowds, the reaching out well beyond the traditional suppliers, consultants and academics—is generally a moot point? Well, it could be, although it is a way of product development that has been gaining significant traction over the past several years, particularly in places like the pharmaceutical industry. Chesbrough points out, “Merck was the science leader in the industry for a very long time, and it did almost all of its drugs from inside its R&D organization. If you look at the company’s pipeline today, a great many of the compounds are sourced from outside the organization.” Merck, like other companies, has discovered the power of openness and is taking full advantage of the leverage it provides. Procter and Gamble has seemingly become the poster child for the practice, being to open innovation what GE is to Six Sigma and Toyota is to Lean Production.

But that doesn’t answer the issue of getting beyond the reticence. And Chesbrough thinks there is a way to appeal to both management and the internal R&D people.

He says that most people think of open innovation only from the context of going Out to bring new ideas or products In. But he says that’s only half of it. The other half is taking something that is In and bringing it Out. “A lot of companies have technology products sitting on their shelves that never get into the business.”

So from management’s point of view, those are assets that have value if they can move it Out to other firms that want to buy or license that development. From internal R&D’s point of view, there is often frustration when what they consider to be the good stuff is kept on a shelf. They would be pleased to see their ideas or products get traction Out there if that’s the way it needs to be.

So open innovation needs to be thought of as a two-way street not a one-way cul-de-sac.

“What gets senior management to buy into this?” he asks. “The fundamental hook is that it offers a way to get more growth out of ideas and technologies you have, and it lets you get more value out of your business by fueling it with external technologies as well as internal technologies. The business driver is the ability to generate more top-line revenue growth and bottom-line profit.”

Another aspect of this comes into play if there are products that have been developed, marketed, and about to be replaced with the next thing. “You might out-license the earlier generation,” Chesbrough says, explaining that this is (1) a source of revenue from what you’ve already developed and sold and (2) a way to keep competitors who license it following behind you (“If your competitors are licensing your stuff, they are less likely to make investments in trying to create something in their
own labs that might leapfrog you and create industry leadership.”).

There needs to be a cultural shift in order for open innovation to work. Management has to understand that there are smart people who are not on the payroll. Internal R&D people have to understand that it is OK to say “I don’t know.”

But no one should think that “open innovation” means “Let’s get rid of internal R&D to
save money by going outside.” In fact, Chesbrough argues that the internal R&D resource may be even more important than it was in the past. He explains, “You still need to do a lot of internal work to understand what is available
and possible outside the company. If you outsource R&D you lose knowledge about what is going on, what is state of the art, who is really doing what they say they’re doing, what is real, and what is not. You can’t give this to your purchasing organization. They don’t have the knowledge, they don’t have the training, they don’t have the processes, and they don’t have the right metrics.”

What’s more, the internal R&D staff is likely to be charged with doing the integration of the things brought from the outside with internal products, processes and/or practices. Otherwise there is the possibility that there is no brand identity, just an accumulation of various and sundry developments.

One thing to keep in mind is that open innovation isn’t binary, it isn’t something that either you are or you aren’t. “Many times you want to find a balance between open and closed,” Chesbrough says.

But at no time should you think that NIH is the right approach. Your customers don’t care what you once did. They want to know what you’re going to do for them now—and next.