Open Market Innovations
A large number of companies are using licensing, joint ventures and strategic alliances to increase output from their innovation processes. They are including their customers, vendors and even their competitors in the innovation processes. This open-market innovation approach to innovation improves speed, cost and quality of innovation. It lets companies set realistic market values for their internal ideas.
Importing new ideas is a good way to enhance the innovative capability of the company. Companies that collaborate with outsiders on their R&D have more ideas to choose from and different kinds of expertise available to them. Tetra Pak took help from outsiders in developing its breakthrough product, Tetra Recart, which makes it possible to sterilize paperboard containers filled with soups, sauces, fruits and vegetables.
Tetra Pak collaborated with its paper and polymers supplier to make the paperboard package capable of withstanding high temperatures, humidity and rigours of commercial sterilization. It worked with another company with expertise in sterilizing hospital equipment to help it figure out how to sterilize the food inside the package. The company could move fast by outsourcing crucial elements of the new product and thus saved many years of development time.
Exporting ideas is a good way to earn revenues and keep creative people motivated. IBM earns a huge amount of revenues in royalties from the patent it exports. People in IBM understand that if they do not act fast on a promising idea it will be offered to outsiders, even competitors. Exporting ideas adds urgency to the innovative process and creative people feel motivated with the knowledge that their good ideas will not be discarded but may be commercialized by some outside company which is interested in it. Bellsouth, the telecommunications company, sells its technologies to its competitors because it understands that they are going to develop it anyway.
Exporting ideas gives companies a way to measure the innovation’s real value and to ascertain whether further investment is justified. Eli Lily offers licenses for compounds under development, when the therapeutic and business value of the drugs is still unclear. When outside laboratories do not show interest, the company knows there is not much potential in the compound. Free markets tell what a product or technology is worth. A company may be very upbeat about a technology but when it takes it to the market, no one may want it. The company is able to save lot of money and effort it would have expended on the technology.
Exporting and importing ideas help companies clarify what they do best. Companies often believe that their core business is brooder than it really is. A sustainable core competency lets the company produce something at a lower cost or at higher quality than other companies in the open market can. When a company tries to weigh its capabilities relative to competitors, it discovers that it is strong in some areas which it should pursue whereas it should withdraw from the rest as others have more capabilities in them.
Boeing discovered that its true comparative advantage lay in system integration and not in manufacturing. Large suppliers were much better in manufacturing but Boeing understood the design and integration complexities of airplane components better than anyone else. It became the designer and system integrator of its planes as well as many of the systems that go into them and withdrew from manufacturing.
But, there are real dangers in sharing innovations. Xerox gave away a stream of innovations from the computer mouse to the graphical user interface and other companies capitalized on them. But companies should not be dismissive of the open-market innovation approach. The buyer of an innovation takes time to bring the idea to market and by that time the seller can introduce the next generation of the innovation. Buyers may not be able to capture the full value of innovation transfers. Disney has developed a superior service model and it is so confident that its system for delivering service cannot be copied by competitors that it makes money by sharing its innovations with them.
And even when an innovation is not shared there is very little chance that competitors will not be able to come up with a similar innovation by reverse engineering. A tweak here and there will save them from risks of patent infringements. An innovator will generally make more money and build more mutually beneficial relationships by licensing an innovation than by suing for patent infringements. The real risk in sharing innovations is in the structuring of the deals. If Xerox had structured their transactions to adequately share in the upside of its innovations, it could have reinvested that money in additional research.
Open-market innovation approach is suitable when the economies of innovation are low i.e. a few people working independently can produce innovations as good as or better than corporate R&D labs. Linux development effort drew thousands of independent software writers to its help. The approach is also suitable when unpredictable situations arise that require new competencies fast and when it is not clear as to which direction the technology would evolve. Cisco explores multiple product strategies with outside partners until one emerges as the most likely. This approach also makes sense when innovations from disparate sources must come together to bring a promising idea to market. A joint venture between Cargil and Dow has been set up to make plastic from renewable crops.