2.5 Open innovation
The term open innovation is generally credited to Henry Chesbrough (2003). It was first advanced in the article ‘The Era of Open Innovation’. Open innovation starts with the premise that ‘not all the smart people work for us’ (Chesbrough, 2003). This approach legitimates the acceptance of ideas that were not invented here (NIH) within the organisation.
You may like to consult Chesbrough's (2003) influential article on open innovation. Open innovation leads inevitably to ideas of innovation networks where different aspects of the total process – i.e. from generating ideas through to commercial realisation, marketing and continuous development – are not just conducted by different people but by different organisations, in an extension of the more widely-known concept of supply chains.
Table 2 compares the principles of closed innovation with those of open innovation.
|Closed innovation principles||Open innovation principles|
|The smart people in our field work for us.||Not all the smart people work for us so we must find and tap into the knowledge and expertise of bright individuals outside our company.|
|To profit from R&D, we must discover, develop and ship it ourselves.||External R&D can create significant value; internal R&D is needed to claim some portion of that value.|
|If we discover it ourselves, we will get it to market first.||We don’t have to originate the research in order to profit from it.|
|If we are the first to commercialise an innovation, we will win.||Building a better business model is better than getting to the market first.|
|If we create the most and best ideas in the industry, we will win.||If we make the best use of internal and external ideas, we will win.|
|We should control our intellectual property (IP) so that our competitors don’t profit from our ideas||We should profit from others’ use of our IP, and we should buy others’ IP whenever it advances our own business model|
Activity 10 Internal and external contributions
Think of a product, process or service, or a combination of these, with which you are familiar. Consider what was involved in its creation, and then draw up a list of those activities which involved people that were not actually employed by the originating organisation. Are there any elements of your existing organisation’s activities that are handled in-house that might be more effectively performed by someone else?
Not very long ago, a key performance indicator for a large organisation was the proportion of its turnover spent on R&D. In some (relatively high-tech) fields this could approach and even exceed 10 per cent. The number would be paraded in the annual report, and city analysts might even be prepared to take this figure as a proxy for an organisation’s ability to innovate. What this indicator does is provide a measure of input (to the R&D process) rather than provide any indication of the effectiveness achieved with that money – and large corporate R&D labs can consume vast amounts of money. Open innovation suggests this is no longer necessarily a reliable indicator of innovation potential.
Previous attempts at gathering intellectual property (IP) often involved buying the company involved to get access to the IP. This was always dangerous as the IP may have been of transient benefit and the process by which that IP emerged may not have worked quite as well under the arrangements favoured by the acquiring organisation. For example, the Daisy Wheel is important in the story of the evolution of the typewriter. When Xerox acquired Diablo Systems, the originators and market leader, they evidently did not offer the key technical player a sufficiently tempting deal; he promptly moved to the other side of Silicon Valley, founded a company called Qume and proceeded to write his way around (his own) patents. Very soon Qume became the dominant player in the daisy wheel market. Successful open innovation obviously requires a dynamic system and network that will endure.
Activity 11 Listen
Transcript: Dr Richard Mason
Dr Richard Mason is senior Vice-President of business development at Cambridge Antibody Technology, a company specialising in monoclonal antibody therapeutics. Richard Mason: Big Pharma is spending an increasingly large amount of money and there are many, many graphs to show this, increasing amounts of money being spent on R&D. I don’t have the exact numbers to hand, but actually the number of new product approvals is not keeping pace. It’s not going up in proportion to the spend on R&D. So the whole phenomenon is probably simplistically answered by saying that the explosion in biomedical science is such that no one company can have it all in house, regardless of how much money they spend. The nature of innovation in this biomedical game is so unpredictable, so from the outside it would appear, so random; happening all over the world and in small institutions, in universities, and companies, whatever. That to think that you’ll get the right innovation you’re after through your own labs is probably something that is more difficult today. Really, organisations such as the large pharmaceutical companies have woken up to this and are realising that they cannot hope to have the next innovation in whatever particular field they’re looking at happening in their own lab, just because they’re spending five hundred million on a particular oncology research campaign doesn’t mean the next way of approaching that particular cancer they’re interested is going to happen in their labs. It may happen in a laboratory in Hungary, or it may happen in a consortium of researchers around the world. That is just the nature of science.
Listen to the Big Pharma and Baby Bio audio clip (01.20mins).
This very short clip illustrates the concept of open innovation in the context of the pharmaceutical industry. The clip suggests that the shape of this sector now fully embodies the principles of open innovation. It is also worth mentioning that some of the Baby Bios were founded by ‘refugees’ from Big Pharma who failed to gain acceptance for their ideas, quite possibly because they were too disruptive.
The Big Pharma / Baby Bio axis represents the classic modern illustration of open innovation. For many years, the major pharmaceutical companies have maintained a massive R&D capability, spending significant proportions of their turnover in the search for the next generation of drugs. The process is long (regulation necessarily demands it be so), expensive and uncertain (the majority of drugs fall by the wayside). Also, the companies involved are increasingly aware of the extent to which their own internal efforts may be a victim of the corporate mindset (‘the way we do things around here’).
On the other hand, the emergence of the biotechnology sector has signalled new products, new processes and almost a new paradigm regarding therapeutic treatments. It seems to be the nature of this emerging field that it is populated by small players with expertise that may be very deep, albeit over a relatively narrow domain. Though the cultures of the two sectors remain far apart – there is scope for mutual interdependence. The baby biotechnology companies have potentially promising ideas for new product(s) that have been worked up to point where some degree of feasibility has been demonstrated. These ideas may be hugely radical for the more traditional pharmaceutical companies, or concern areas that had earlier been discarded as ‘unpromising’.
However, once they have acquired the new approach, big pharmaceutical companies have other skills that come into play including negotiating the regulatory process, scaling up to commercial volumes and marketing to the medical profession. The number of possible permutations of cooperation between the players are legion, with a mass of complex funding and licensing agreements the frequent result. Yet, it does seem to be working, as both parties acknowledge there is much to be gained from working together.
Activity 12 The not-invented-here syndrome
Can you think of a potentially useful idea that was effectively blocked because it came from the wrong place?
Sometimes this syndrome comes into play due to opposition to doing things the way the competition does it – at other times, the rivalry can be between divisions of the same organisation.