The Innovation Ecosystem
“Let’s not reinvent the wheel” is an old adage, but only recently has the good sense of it been embraced by a growing number of corporations. Tired of low returns on their investment dollars, companies are looking outside their organizations for new ideas and products. This marks a whole different way of looking at innovation, and it requires a different set of management techniques and tools to make it work.
Henry Chesbrough, professor at the University of California at Berkeley and author of Open Innovation, notes, “While the key to successful innovation once lay in the controlled environment of the corporate laboratory, today the widespread distribution of useful knowledge makes such control unfeasible. Competitive advantage now often comes from leveraging the discoveries of others” (O’Leary-Collins, 2005).
Prof. Chesbrough distinguishes closed innovation – in which an organization produces, develops and commercializes its own ideas internally – from open innovation, in which companies commercialize both their own ideas and innovations that emerge from outside the organization. The open-innovation paradigm also assumes that companies can market some of their internal ideas by using external channels (Chesbrough, 2004).
So, how does this work in practice? An article in Harvard Business Review provides a detailed look at Procter & Gamble’s strategy, called “connect and develop.” Larry Huston, vice president for innovation and knowledge, and Nabil Sakkab, senior vice president for corporate research and development, explain, “By 2000, it was clear to us that our invent-it-ourselves model was not capable of sustaining high levels of top-line growth.... Our R&D productivity had leveled off, and our innovation success rate – the percentage of new products that met financial objectives – had stagnated at about 35%” (2006, p. 60).
P&G decided it would work hard to find good ideas from outside the corporation and bring them inside to boost innovation. Of course, deciding to do this is easy, but making it work is a major challenge. P&G realized it was going to have to be selective, knowing just what kind of products it was looking for. One of its strategies for doing this is identifying the top 10 consumer needs that, if addressed, will help the company expand its brands in each of its businesses. Once these lists are assembled, they’re broken down into science problems. Then the corporation begins looking for ways to solve those problems.
The connect-and-develop strategy entails tapping into various networks, both proprietary and open, to help innovation along. One of those proprietary networks is made up of so-called technology entrepreneurs – that is, senior P&G employees who “combine aggressive mining of the scientific literature, patent databases, and many data sources with physical prospecting for ideas – say, surveying the shelves of a store in Rome or combing product and technology fairs” (Huston & Sakkab, 2006, p. 63).
But networks don’t have to be proprietary to be useful. One of P&G’s open networks, InnoCentive, is a Web-based community that matches contract scientists with R&D questions that companies are trying to solve. Of the problems that P&G has posted in the online community, about a third have been solved. In fact, success rates are high for the whole connect-and-develop approach. Over a third (35%) of P&G’s new products have features that got their start somewhere outside the corporation. As recently as 2000, the number was 15%. Meanwhile, P&G has raised its R&D productivity by almost 60%, innovation success rates are up by over 100%, and the cost of innovation is actually down (Huston & Sakkab, 2006).
P&G may well be on the cutting edge of practices that will become commonplace in coming years. Currently, “open-market innovation” is used by only about a quarter of companies surveyed by Bain & Company, a global business consulting firm. But Michael Docherty (2006), CEO of Venture2, predicts that “within the next few years, if it’s not already happened, the concepts of innovation and collaborative development will be understood and accepted as the next major wave in the art and science of Product Development practices.”
Docherty uses the word “ecosystem” to describe the network of business partnerships and interdependencies that emerge from an open-innovation paradigm. In such a system, companies that rely on one another for innovation will need to find common ground and aligned goals. He points to Whirlpool Corporation as an example of an organization that has much experience managing co-development programs. One of the methods Whirlpool uses is Partner Summits, which are multi-day sessions that involve all the essential players in the partnership. Relationships are forged during meaningful discussions and social events, paving the way for improved collaboration in the future.
Some business thinkers even speculate that changes in the way companies innovate could help transform our ideas of what an enterprise is. IBM Corporation’s Global Innovation Outlook 2.0 report (2006) envisions that the enterprises of the future may be more like loose aggregations of individual collaborators than today’s structured organizations. “In such a collaborative, contribution-based environment, the role of the traditional enterprise could shift to orchestration and facilitation of the endeavors between these individuals or groups of individuals” (p. 10). If so, then today’s companies aren’t just reinventing innovation, they’re reinventing themselves.
For more on Michael Docherty’s article “Primer on ‘Open Innovation’: Principles and Practice,” click here.
For the article “‘Open Innovation Myths, Realities, and Opportunities,” by Henry Chesbrough, click here.
For more on Henry Chesbrough’s book Open Innovation, click here.
For more on InnoCentive, click here.
For more on Bain’s Management Tools & Trends survey, click here.
For more on the Global Innovation Outlook 2.0 report, click here.
For more on the Harvard Business Review’s online version, click here.
For more on AMA’s recent research, including The Quest for Innovation, click here. Readers may have to register to access the full reports.
Documents used in the preparation of this TrendWatcher include the following:
Chesbrough, Henry. “Managing Open Innovation.” Research Technology Management, January/February 2004.
Docherty, Michael. “Primer on ‘Open Innovation’: Principles and Practice.” PDMA Visions, April 2006.
Huston, Larry and Nabil Sakkab. “Connect and Develop: Inside Procter & Gamble’s New Model for Innovation.” Harvard Business Review, March 2006, pp. 58-66.
IBM. Global Innovation Outlook 2.0, 2006.
O’Leary-Collins, Michael. “A Powerful Business Model for Capturing Innovation.” Management Services. ProQuest. Summer 2005.
Henry Chesbrough, professor at the University of California at Berkeley and author of Open Innovation, notes, “While the key to successful innovation once lay in the controlled environment of the corporate laboratory, today the widespread distribution of useful knowledge makes such control unfeasible. Competitive advantage now often comes from leveraging the discoveries of others” (O’Leary-Collins, 2005).
Prof. Chesbrough distinguishes closed innovation – in which an organization produces, develops and commercializes its own ideas internally – from open innovation, in which companies commercialize both their own ideas and innovations that emerge from outside the organization. The open-innovation paradigm also assumes that companies can market some of their internal ideas by using external channels (Chesbrough, 2004).
So, how does this work in practice? An article in Harvard Business Review provides a detailed look at Procter & Gamble’s strategy, called “connect and develop.” Larry Huston, vice president for innovation and knowledge, and Nabil Sakkab, senior vice president for corporate research and development, explain, “By 2000, it was clear to us that our invent-it-ourselves model was not capable of sustaining high levels of top-line growth.... Our R&D productivity had leveled off, and our innovation success rate – the percentage of new products that met financial objectives – had stagnated at about 35%” (2006, p. 60).
P&G decided it would work hard to find good ideas from outside the corporation and bring them inside to boost innovation. Of course, deciding to do this is easy, but making it work is a major challenge. P&G realized it was going to have to be selective, knowing just what kind of products it was looking for. One of its strategies for doing this is identifying the top 10 consumer needs that, if addressed, will help the company expand its brands in each of its businesses. Once these lists are assembled, they’re broken down into science problems. Then the corporation begins looking for ways to solve those problems.
The connect-and-develop strategy entails tapping into various networks, both proprietary and open, to help innovation along. One of those proprietary networks is made up of so-called technology entrepreneurs – that is, senior P&G employees who “combine aggressive mining of the scientific literature, patent databases, and many data sources with physical prospecting for ideas – say, surveying the shelves of a store in Rome or combing product and technology fairs” (Huston & Sakkab, 2006, p. 63).
But networks don’t have to be proprietary to be useful. One of P&G’s open networks, InnoCentive, is a Web-based community that matches contract scientists with R&D questions that companies are trying to solve. Of the problems that P&G has posted in the online community, about a third have been solved. In fact, success rates are high for the whole connect-and-develop approach. Over a third (35%) of P&G’s new products have features that got their start somewhere outside the corporation. As recently as 2000, the number was 15%. Meanwhile, P&G has raised its R&D productivity by almost 60%, innovation success rates are up by over 100%, and the cost of innovation is actually down (Huston & Sakkab, 2006).
P&G may well be on the cutting edge of practices that will become commonplace in coming years. Currently, “open-market innovation” is used by only about a quarter of companies surveyed by Bain & Company, a global business consulting firm. But Michael Docherty (2006), CEO of Venture2, predicts that “within the next few years, if it’s not already happened, the concepts of innovation and collaborative development will be understood and accepted as the next major wave in the art and science of Product Development practices.”
Docherty uses the word “ecosystem” to describe the network of business partnerships and interdependencies that emerge from an open-innovation paradigm. In such a system, companies that rely on one another for innovation will need to find common ground and aligned goals. He points to Whirlpool Corporation as an example of an organization that has much experience managing co-development programs. One of the methods Whirlpool uses is Partner Summits, which are multi-day sessions that involve all the essential players in the partnership. Relationships are forged during meaningful discussions and social events, paving the way for improved collaboration in the future.
Some business thinkers even speculate that changes in the way companies innovate could help transform our ideas of what an enterprise is. IBM Corporation’s Global Innovation Outlook 2.0 report (2006) envisions that the enterprises of the future may be more like loose aggregations of individual collaborators than today’s structured organizations. “In such a collaborative, contribution-based environment, the role of the traditional enterprise could shift to orchestration and facilitation of the endeavors between these individuals or groups of individuals” (p. 10). If so, then today’s companies aren’t just reinventing innovation, they’re reinventing themselves.
For more on Michael Docherty’s article “Primer on ‘Open Innovation’: Principles and Practice,” click here.
For the article “‘Open Innovation Myths, Realities, and Opportunities,” by Henry Chesbrough, click here.
For more on Henry Chesbrough’s book Open Innovation, click here.
For more on InnoCentive, click here.
For more on Bain’s Management Tools & Trends survey, click here.
For more on the Global Innovation Outlook 2.0 report, click here.
For more on the Harvard Business Review’s online version, click here.
For more on AMA’s recent research, including The Quest for Innovation, click here. Readers may have to register to access the full reports.
Documents used in the preparation of this TrendWatcher include the following:
Chesbrough, Henry. “Managing Open Innovation.” Research Technology Management, January/February 2004.
Docherty, Michael. “Primer on ‘Open Innovation’: Principles and Practice.” PDMA Visions, April 2006.
Huston, Larry and Nabil Sakkab. “Connect and Develop: Inside Procter & Gamble’s New Model for Innovation.” Harvard Business Review, March 2006, pp. 58-66.
IBM. Global Innovation Outlook 2.0, 2006.
O’Leary-Collins, Michael. “A Powerful Business Model for Capturing Innovation.” Management Services. ProQuest. Summer 2005.