Corporate Open Innovation: Hype versus Reality

We need to be careful not to unduly herald corporate open innovation as the 'new new thing', lest we fail to fully understand the dynamics behind it, or squander its potential benefits by over-selling it.

"With the economy softening, it's tempting for companies to turn off the lights and shut the door on innovation efforts until things pick up," suggested Jeneanne Rae, co-founder of the Virginia-based consultancy, Peer Insight, in the pages of BusinessWeek last year.

Instead she argued that "[o]ne of the best options for recessionary times [is corporate open innovation, which involves] connecting with others to find new ideas and, often, to co-develop and co-market them".

Corporate open innovation has been widely celebrated, from the Raymond open-innovation conference in the Netherlands and the planned Co-creation Lab at the London School of Economics, through to the cult US business book Wikinomics and the Cambridge-MIT Institute Partnership Programme.

The term corporate open innovation was coined by Henry Chesbrough and elaborated in his 2003 book Open Innovation. Chesbrough, a 50-something former computing industry executive, is executive director of the Center for Open Innovation at the Haas Business School, part of the University of California, Berkeley.

Though less well know in the UK, he has presented at NESTA events, where his direct and engaging style and familiar West Coast easy charm provided a welcome change from that of some of his colleagues in the British academy.

Explaining corporate open innovation, Chesbrough notes that corporations have tended to rely on closed innovation systems: an internal process with only way in or out - a model typical of the US but for which Japan is the poster child, as noted in an Economist article on Nippon Inc. The success of this mode in the US was revealed in the work of the celebrated business historian Alfred Chandler, who argued that the scale of investment companies such as GM and DuPont could leverage, was key.

For Chesbrough, the idea that one organisation can effectively manage research, product development and marketing is flawed. He identifies five factors driving new approaches to innovation in general, and corporate open innovation (COI) in particular: a mobile workforce; more capable universities as a source of research; diminished US hegemony; the erosion of oligopoly market positions; and the greater importance of venture capital, with its focus on investment in development over research.

Chesbrough uses Xerox PARC (the Palo Alto, California-based lab, founded as the research division of the Xerox Corporation, which laid the foundations for much of modern computing but 'fumbled the future') as an example of the problems of closed innovation. He notes that in a situation of underlying uncertainty and incomplete information, PARC sensibly sought to minimise the risk of false positives but didn't address false negatives. That is, innovations that should have been successful but were rejected.

Open versus closed innovation

The first problem is with Chesbrough's evidence. He has a tendency to paint a black and white picture, contrasting an old (necessary but closed and undesirable) innovation model with a new (necessary and open and desirable) model. But firms have always been open to some degree, as noted in a 2007 Economist article.

Silicon Valley flourished partly as a result of the dynamic and open connections between academics and researchers, investors, and new and established businesses, epitomised by Hewlett-Packard (H-P). Apple co-founder, Steve Jobs, grew up in Mountain View, near to H-P's Palo Alto headquarters, and at weekends would wander the neighbourhood, engaging with engineers from H-P and other firms at their garage workbenches.

He even had the chutzpah to ring Bill Hewlett at home to ask for parts he needed for an early electronics project. (Hewlett assisted - and offered his unknown caller a summer job at the company, giving him valuable experience.) Later, Jobs and Apple co-founder, Steve Wozniak, were active in the celebrated, and very open, Homebrew Computer Club, in which William H. Gates III was a sometime participant.

This informal, enthusiastic and helpful culture, centred around people, places and loose organisations, has for a long time facilitated more formal research and innovation activities in the Valley.

Although Chesbrough cites Xerox PARC as an example of a closed innovation system this is only true on the surface. Xerox was an early investor in Apple, and allowed a group, including Jobs, to review human-computer interaction research being conducted at PARC. (In this instance Xerox's degree of openness is disputed in the accounts given by authors Michael Hiltzik and Jeffrey S. Young.) Insights from this visit formed the basis of the Macintosh graphical user interface - one of the key innovations that led to the product's success.

Soon after its creation, Xerox PARC founded the PARC Forum to host free, public talks for employees and people from the nearby academic, industrial, and entrepreneurial communities of Silicon Valley. One can only guess at the number of informal and 'open' conversations that led to innovations, which this forum has played host to over its 30 years.

More formally, since 1995 Xerox and Japan's Fuji have a joint venture, Fuji Xerox, which includes FX Palo Alto Laboratory, established to conduct research around software and information technology. While more formal, this is far from the classic closed innovation model.

In reality, the closed innovation model has never really existed, as attested by the long-established patent system, which facilitates openness in innovation - and which has assigned Xerox over 18,000 patents in the last 30 years. The stock market also facilitates open innovation. If a firm wants or needs innovations that have been developed externally, the possibility of purchasing the company in question, even if it is privately held, is rarely closed.

Open innovation - not an open shut case

The corporate history of innovation models, even in the era Chandler researched, is far from black and white. We need to be careful not to unduly herald corporate open innovation as the 'new new thing', lest we fail to fully understand the dynamics behind it, or squander its potential benefits by over-selling it.

About the author

Nico Macdonald is a consultant and researcher in information technology, innovation and social progress.

He writes for publications including BBC News, the Register, silicon.com, Guardian Technology, and BusinessWeek.com.

He also programmes the Innovation Reading Circle and the Innovation Forum. He is current researching innovation models based on a study of the development of the Internet. His work is documented at spy.co.uk.