Open Innovation with Chinese Characteristics

Open Innovation in China is greatly affected by the powerful role of the Chinese Communist Party. Xi Jinping thought introduces a tension between the ‘decisive role of the markets’ to allocate resources and stimulate innovation across the economy and ‘the leading role of the Party’ to guide the development of innovation in the most important industries. This tension plays out differently in different industries in China. In high-speed rail, the tension has been adroitly managed, creating an organization with world class innovation capabilities that is a peer with the best of the rival firms in the world. In automotive and semiconductors, however, the tension has been more problematic. The state-owned enterprises are well aligned with the Party, while it is the privately owned companies and foreign companies that are driving innovation.

The Back End of Open Innovation

There is a Valley of Death inside many organizations, between the innovation managers and the business units of the company. This internal valley results from human, organizational, and structural bottlenecks that impede the flow of knowledge from the laboratory to the market. A powerful example of these bottlenecks surfaced in recent research at NASA. Four companies’ practices for managing these bottlenecks are discussed: SAP, Intel, EMC, and Royal Bank of Scotland. Companies must approach these bottlenecks with care, and examine their compensation systems, their funding processes, and talent management practices, to connect the back end of the innovation process to the front end of that process.

Engaging with Startups to Enhance Corporate Innovation

Startups can be a powerful, effective ingredient in achieving a corporate innovation strategy. But startups worry that corporates are going to steal their ideas, and are too slow in their decision-making. Startups welcome corporate capital, but often their real needs are access to a corporation’s latest tools, technologies, channels, and customers. Large companies have multiple resources with which to engage startups. It isn’t just about money. Traditionally, large companies have deployed equity-based models of engagement, such as corporate venture capital. CVC has a role to play, but takes significant time and effort to manage. Equity-based models provide control, but don’t scale. Newer models of engagement with startups use a logic of influence, so that large companies can move faster and work with many more startups at the same time. These models relinquish control, but are built to scale.

From Open Science to Open Innovation

Open science is a powerful way to discover and disseminate new knowledge. But the very norms that animate open science can sometimes inhibit its subsequent commercialization. There exists a Valley of Death between the culmination of a scientific project, and the later commercial use of that science. While a fundamental knowledge of how a technology works may have been achieved, there is far too little known for businesses to invest in developing that knowledge further. And the best use of a new discovery often is unknown to those who first discover it. This is where open science must start to give way to Open Innovation. IMEC and CERN’s ATTRACT project provide two examples wherein a strong culture of open science co-exists with a thriving Open Innovation culture as well to traverse the Valley of Death

Open Innovation Best Practices

Open Innovation can be a powerful engine for growth, if properly managed. P&G was an early, powerful trendsetter in achieving growth from Open Innovation. Open Innovation also can be valuable as a tool to enable environmental sustainability, as seen by Enel and Carlsberg However, even organizations who embody effective Open Innovation practices can have trouble sustaining growth over time. Practices that initially led to strong growth have been followed by periods of declining revenue, or even bankruptcy. Both Qwirky and P&G have struggled to sustain growth via Open Innovation. Open Innovation requires a certain mindset to sustain growth over time. Following the best practices alone may not keep the company ahead of its competitors. Following Open Innovation principles may prove more enduring.

The Exponential Paradox

Technology is advancing at an accelerating rate. Yet the rate of economic productivity growth is slowing down. This is the Exponential Paradox. It is not enough for technology to advance; in order to deliver economic and social value, technology most also be broadly disseminated, and then absorbed. Further insight can be achieved if we look back farther in time. Why was productivity growth so high during the 1940s to the 1970s? Part of the answer lies in the substantial investments made in infrastructure that fostered more rapid technical advance, and equally, wider technology dissemination and absorption. A renewed investment in innovation infrastructure is needed, in order to resolve the Exponential Paradox. Companies can start by emphasizing Shared Value approaches to developing and deploying their technologies.

Lean Startup and Open Innovation

Lean Startup is a new and exciting process to discover new business opportunities and new business models. However, the concept must be adapted before it can work effectively inside established companies. Just as startups are not tiny versions of large companies, so too are large companies not simply large versions of startups. Lean Startup inside large companies requires careful internal negotiations with senior management, as well as getting out of the building to find customers. Open Innovation can complement and extend Lean Startup processes. Both use resources efficiently, while Open Innovation also leverages other people’s resources and shares risk. Telefonica provides a good example of Lean Startup inside a large company. It has reduced costs by 48 percent per project, increased its speed to market by 260 percent, and pursued 45 percent more chances to innovate within the same budget.

Open Innovation Results in Smart Cities and Smart Villages

The dimensions of generation, dissemination, and absorption apply in the public and social sectors, as well as in the private sector. Smart Cities initiatives have generated a lot of possibilities, but to date have not delivered much social or business value. Much of the fault lies in not in the generation of technologies, but in the lack of dissemination and absorption of these initiatives beyond a narrow circle of specialists. Open Innovation can play a critical role in addressing the needs of rural villagers by enticing profit-seeking companies to engage in business development research in rural markets. These companies, if successful, become agents of dissemination and scaling via markets. Smart Villages is a promising new initiative for addressing the needs of villagers in poor, underdeveloped rural settings. However, the three dimensions of generation, dissemination, and absorption apply here as well.

Open Innovation in the Twenty-First Century

This chapter reviews the core ideas behind Open Innovation, discusses what it is and is not, and shows how it can deliver more value to organizations and to society. Outside-in Open Innovation strengthens the current business and current business model, while inside-out Open Innovation searches for alternative businesses and business models. The chapter explores the connection between technology development and the business model, and examines the use of Open Innovation in intellectual property and in services. However, Open Innovation is not a panacea. Its boundary conditions and limitations must also be acknowledged. As with Chapter 1, the processes of generation in innovation must also be supported by equal attention to innovation dissemination and innovation absorption within the firm, in order for organizations to create and capture value from Open Innovation. Finally, Open Innovation is moving beyond collaborations between two actors, to a broader ecosystem focus that connects many actors together.

Introduction

The Introduction discusses the impact of the Great Recession upon innovation spending, and with it, a rethinking of how companies can and should innovate. Open Innovation itself has been affected by the recession, and is sometimes used now as a synonym for outsourcing or cost cutting, which was not the intention of the original concept. A renewed understanding of Open Innovation is needed to unlock its potential to deliver growth, rather than simply cut costs. The role of innovation infrastructure, both for the overall society and for the focal organization, is emphasized as a key to renewing growth through innovation. The Introduction goes on to describe the plan of the book, and introduces the three facets of innovation: generation, dissemination, and absorption. Four possible paths for reading the book are outlined, for practicing managers of innovation, for innovation policy makers, for academic scholars, and for very time-pressed readers.