Corporate innovation, or open innovation, is a business model that encourages you to connect with outside sources so you can profit from exciting new investment opportunities. Some traditional models focus solely on the benefits of internal research and development. Open innovation, however, maintains that both internal and external processes further business growth, lead to better innovation, and foster new technologies.
To uncover the foundations of corporate innovation, you need to travel back to the early 1990s, a few years before the technology boom that revolutionized the Internet sector. In 1993, Steve Haeckel, director of Strategic Studies at IBM’s Advanced Business Institute, developed the concept of “sense-and-respond” (S&R) in “Managing by Wire,” an article published in the Harvard Business Review. S&R provided a managerial framework for large companies facing turbulent changes in the Information Age. In order to flourish, companies would need to adapt — and quick.
Haeckel focused on six concepts that would spearhead business growth, including strong negotiation, customer engagement and commitment management. However, as innovative as this concept was, it was classed as closed innovation because it only focused on a company’s internal processes. Open innovation, on the other hand, is far more outward-looking.
Dr. Henry Chesbrough, a professor at the Haas School of Business, UC Berkeley, postulated “open innovation.” He introduced the concept in his 2003 book before expanding the notion in subsequent years.
“Conceptually, it is a more distributed, more participatory, more decentralized approach to innovation,” he told Forbes in 2011. “[It’s] based on the observed fact that useful knowledge today is widely distributed, and no company, no matter how capable or how big, could innovate effectively on its own.” Unlike Haeckel’s S&R model, open innovation suggests no company — not even the billion-dollar unicorns that have dominated industries in recent years — can thrive without outside influences.
Open innovation, Chesbrough says, encourages brands to procure innovation from external sources. This reduces the time it takes for products to get to market and lets a company release products outside the parameters of their traditional business model. “For business, open innovation is a more profitable way to innovate,” says Chesbrough. “It can reduce costs, accelerate time to market, increase differentiation in the market, and create new revenue streams for the company.” This paradigm reflects the shift from internal research and development activities, where products were developed on-site, to external technologies and processes.
Open innovation comes with loads of benefits. Brands can invest in innovative products without having to manufacture them in-house. It also provides a company with a competitive advantage over peers in their niche, producing lucrative returns in a challenging economic climate.
Open innovation and corporate venture capital (VC) fit like a glove. As more money is invested in corporate VCs — $74.2 billion was spent in 2015 alone, with $17.8 billion coming from investors like Google Ventures and Cisco Investments — conglomerates are seeking out the hottest new startups.
Just like Chesbrough said back in 2003, brands crave innovation from external sources because it reduces costs. If companies choose the right startup, they could generate a hefty return on their corporate VC dollars.
Venture capital opportunities boomed in the late 1990s during the dot-com bubble; today, big-name brands from Panasonic to Colgate spend millions on startup investment. Then there’s the recent trend of incubators and accelerators, which provide startups with funding and resources during their fragile initial phase.
Open innovation is booming. More companies are looking further afield for the latest talent and innovation, and are reaping the rewards. In a corporate startup engagement, both parties prosper. Brands can invest in the latest technology and ideas without any of the set-up or manufacturing costs, and start-ups can expose their products to a potentially massive audience.