On a recent trip to Hawaii, I packed a copy of Open Innovation: The New Imperative for Creating and Profiting from Technology by Henry Chesbrough.  As a recent college grad, I am making the transition from classroom to workplace and it’s been a journey seeing these concepts I’ve learned in theory, be put into practice.  For you seasoned vets of innovation, I hope to provide a fresh perspective on this proven theory and for those of you newer to the scene, I hope this serves as a proper introduction.

The book focuses on explaining the need to “innovate innovation” so companies don’t become stagnant in their R&D efforts.  The traditional approach companies have used in the past encompasses the “Closed Innovation Paradigm”.  Idea tanks (aka R&D departments) generated ideas, quickly narrow down the list and very few new ideas ever reach development – this entire process happening internally.

Companies like Xerox and Procter & Gamble began to realize that this approach was no longer working because many ideas that were generated in their labs required a unique business model in order to be successful, but these large organization were not able to accommodate this.  Rather than throwing those powerful ideas into their graves, Xerox, for example, started the Xerox Palo Alto Research Center (PARC), an incubator for new ideas that could be nurtured and grow into strong concepts with their own business models.  “We need to be innovative in the area of innovation itself,” said Director Emeritus at PARC, John Seely Brown.  Thus began the “Open Innovation Paradigm” in practice today.

PARC was the nesting ground for companies such as 3Com and Adobe, who’s founders began at Xerox and had ideas they were allowed to pursue independently within the Research Center.  During Managing Innovation and Change, a class I took at the University of Portland, and an entrepreneurial program I participated in, I became familiar with Intel Capital.  This division of Intel acts as a venture capitalist firm that funds technical start-ups, and later on Intel can acquire these companies or allow them to remain independent.  When I first heard of this concept I thought it made total sense, and I wanted to learn more about the theory and how it was put into practice.

The theory behind this method of open innovation is that it is more efficient to seed these small companies with funds and let them take their own paths rather than trying to develop these types of technologies from the ground up in their own R&D departments.  Also, sometimes a technology that is developed is not an area that will directly benefit products at their parent company.  However, there are often times opportunities for these products in new or emerging markets.  Although the technologies might not be executed within the parent company, licensing or selling the technology can bring significant revenue and payback for an organization who funded the exploration and development of these ideas/technologies.

Between 1998 and 2000, venture capital funding increased from $700 million to $80 billion in the Unites States (Harvard Business School Press, 2001).  This allowed for an increased flow of ideas in AND out of companies.  This collaborative approach to product development really spurred the development of new markets and companies began leveraging external resources (e.g. they could buy a newly developed technology rather than having to develop it on their own) to build better products faster than ever before.

Ten years later this approach to open innovation is gaining even more traction.  The traditional approach relying on internal R&D simply won’t cut it anymore.  There are too many great ideas to capitalize on, and when companies get trapped in the internal funnel of tunneling idea generation, their innovation is stifled.  By maintaining a porous development process, allowing ideas to flow in and out, companies are more profitable while also boosting innovation across industries.  Winner: Open Innovation.

Picture source: Henry William Chesbrough (2006) “Open Innovation: The New Imperative for Creating and Profiting from Technology“