How to Implement R&D-Driven Open Innovation

APPLIED INNOVATION MANAGEMENT™
brought to you by InnovationManagement
#3 – 2011
HOW TO MAKE OPEN
INNOVATION WORK
FOR YOUR R&D
by
Frank Mattes,
Founder and CEO
of innovation-3

#3-2011 brought to you by InnovationManagement
To order please visit www.InnovationManagement.se
4
About this tool
Applied Innovation Management™ is a series of tools for innovation
management practitioners created in collaboration with experts in the
field of innovation management from leading companies, business schools
and universities. This tool discusses how a firm can find the best approach
to R&D-driven Open Innovation (Outside-in) based on the insights from
a number of projects in this space. In addition, 20 proven approaches for
globally leading firms will be high-lighted to inspire your organization to
put an effective Open Innovation system in your R&D in place.
Transforming the firm’s innovation approach in R&D from a closed to an open one promises huge benefits such as
increased agility and effectiveness, lowered risk and revenue growth though new products. A systematic approach
to this will benefit your organization by:
having more choices for solving scientific and technical problems
realizing shorter time-to-market
offloading R&D risk to innovation partners
having increased chances for successful breakthrough innovations
extending the firm’s base of external innovators and suppliers
THIS IS WHAT YOU CAN EXPECT FROM THIS TOOL
This tool will provide you with fresh experiences and insights from how leading firms are approaching Open In-
novation in their R&D. It will enable you to:
get a basic understanding of both the problems and solutions connected to R&D-driven Open Innovation
achieve more constructive and higher quality management team discussion by providing a common ground and
a common language about preparing for open approaches in R&D
better reflect on the situation of your firm and take action to create an environment that supports R&D-driven
Open Innovation
prepare for the challenges and avoid repeating the mistakes of others
identify the vital steps that need to be considered when designing and implementing an Open Innovation system
within your firm’s R&D
This document is a partial preview. Full document download can be found on Flevy:
http://flevy.com/browse/document/how-to-implement-randd-driven-open-innovation-1188

77
PART 2UNDERSTANDING
THEORY & BACKGROUND
PART 2 PROVIDES A DISCUSSION OF SOME OF THE
CHALLENGES RELATED TO THE SUBJECT OF THIS TOOL.
IT INCLUDES EXAMPLES AND A THEORETICAL FRAMEWORK
FOR UNDERSTANDING THE MECHANISMS RELATED TO THE
CHALLENGES OF TRANSFORMING THE FIRM’S INNOVATION
APPROACH IN R&D FROM A CLOSED TO AN OPEN ONE.
Open Innovation on the agenda
Why OI matters

1010
Increased chances of successful radical
innovations (‘Game Changers’)
Multiplied innovation resources
Fixed internal R&D costs transformed into
variable costs
Extended supplier base.
SIX FORCES IMPACTING
INNOVATION MANAGEMENT
Opening up the approach to innovation is an opportu-
nity not just for achieving competitive advantage. In
many industries this is necessary to remain in business
since the nature of innovation management is in a pro-
cess of changing fundamentally. Six megatrends are
creating new realities for innovation managers:
Explosion of knowledge: According to Derek
De Solla Price, 80% to 90% of the scientists
that have ever lived are alive today. This leads
to an explosion of knowledge. For example,
statistics from the World Intellectual Property
Organization show that the number of patents
annually grew at a CAGR of 2.1% over the
20th century, at a CAGR of 2.8% since 1960
and at a CAGR of 3.5% since 1990.
Globalization of knowledge: A large number of
Asian universities and corporate campuses are
ranked among the best globally. This trend will
prevail in the future, driven by the huge number
of students in Asia being awarded engineering
degrees (there are 1.2 million new engineers
annually in India and China, compared to
40,000 in Germany) and the willingness to
absorb knowledge in Western countries – the
World Migration Report ranks Asia first for
students studying abroad.
Shorter product life cycles: In most industries
the average life-span of new products is shorter
than the life-span of the previous product
generation. This obviously increases the need for
higher innovation performance.
New scientific boundaries: New scientific
disciplines (e.g. nanotechnology) and the merging
of established disciplines (e.g. electronics/material
sciences) is creating opportunities and threats.
In order to benefit the firm needs to absorb
complementary knowledge. Due to shareholder
value considerations this usually cannot be done
by increasing the firm’s headcount.
Convergence of industries: In many cases the
boundaries between industries are ‘blurring’,
driven by converging value propositions and
markets. Examples of industry convergence
include Food/Pharma, Telecom/Media and
Automobile/Energy. From an innovation
perspective, industry convergence urges firms to
co-innovate with firms from other industries to
develop ‘complete’ solutions.
Internet-based social networks: The rise of Web-
based social networks (Web sites that enable
individuals to build online social relations with
others with the same interests) is a megatrend in
our society. For example, Facebook (currently the
largest social network) has more than 600 million
members with an average age of 38. When these
‘digital natives’ will become innovation leaders,
they will apply the networked lifestyle to the
innovation management approach of their firm
and enable them to ‘increase both their learning
and their flexibility in ways that would not be
possible within a self-contained hierarchical
organization’, as Julia Liebeskind found in a study
on how new biotechnology firms innovate.

1313
WHERE THE
FIRM SHOULD
INNOVATE OPENLY
Leading firms have a clear view
of where they want to innovate
openly – and where they prefer to
innovate in a closed way.
Leading firms are very clear about in which fields they
innovate openly and in which fields they deliberately
apply a closed innovation model. They identify op-
portunities for innovating openly by analysing four
dimensions.
TECHNOLOGY FIELDS
The firm’s product and process innovations are based
on a limited number of technology fields. Technology
fields usually are differentiated by specific expertise in
research, development and production. For example,
one of my FMCG clients has identified 150 technol-
ogy fields in which it operates.These include analytical
chemistry, biochemistry, computational modelling, mi-
crobiology, perfumes and flavours, packaging, proto-
typing, polymers, structured substrates and toxicology.
To determine in which of these fields innovation should
be open one should analyse technology attractiveness
and the relative strength of the firm. Good candidates
for OI are technology fields that are very attractive but
where the firm’s relative strength is limited.
In practice, the results of this thought process can be
visualized in a portfolio diagram, see chart 2. Tech-
nology attractiveness (measured e.g. by the breadth
and versatility of applications of a specific technology
field, the assumed potential for further development
and the compatibility with other technologies) is de-
picted on one axis. The other axis shows the firm’s
competitive strength in this technology (measured
e.g. by a subjective assessment and/or a technology
audit and the potential for development of internal
know-how and skills).
Every technology field can then be allocated on the
portfolio diagram. Additional information such as the
resources invested or the number of projects can be
added and represented by different sized bubbles.
Good candidates for OI are in the upper left quadrant.
Innovation in technology fields in the upper right
quadrant should be done in closed mode. Decisions
on opening up innovation in technology fields in the
CHART 2. Finding suitable technology fields for OI

1616
After determining
where the firm
should innovate
openly a list of
potential open
approaches to
innovation in
the identified
fields should
be compiled.
This list should
contain the OI
approaches that
the firm already
practices and
additionally best
practices from
other firms.
Example: Beiersdorf conducts one-to-
one workshops with its most innovative
suppliers several times a year and a one-
to-many workshop with less innovative
suppliers once per year.
>> 02. Supplier integration
Close integration of suppliers in the design
and development phases is important to
exploit the supplier’s expertise for break-
through features. This approach may be
complemented by a decision to invest in
a key supplier’s production capacities in
order to secure future supply.
Example: Apple is executing a well-
crafted strategy in LCD displays. Apple
not only involves the LCD manufactur-
ers intensively in the product develop-
ment process, it also invests heavily in
selected vendors and dedicated display
production facilities. This is done to
secure Apple’s leadership in advanced
low-temperature polysilicon display
technology (which provides extremely
high resolution in small displays).
>> 03. Supplier innovation network
Leveraging the innovation impulses from
a large base of suppliers can be done in
a proprietary, Web-based hub-and-spoke
innovation network set up and managed
by the firm. In a confidential and pro-
tected environment the firm sends out Re-
quests For Ideas, Requests For Concepts
or Requests For Solutions to the members
of its proprietary innovation n in which
existing suppliers as well as new innova-
tion partners which may become suppliers
in the future are present.
Example: Beiersdorf’s Pearlfinder inno-
vation network.
>> 04. OI intermediaries
Open Innovation intermediaries are service
providers that help the firm to connect to
potential solution providers in the case of
technical or scientific challenges. There
are different kinds of Open Innovation
intermediaries, with some acting as agents
(i.e. representing one side of a transaction)
while others take the role of brokers or
market-makers.
Example: Nearly all leading firms (e.g.
Siemens, Henkel, Procter&Gamble and
BASF) are using OI intermediaries to
speed up particular OI challenges.
>> 05. Listening posts/
Technology scouts
In order to monitor technological trends
and to identify start-ups that have the po-
tential to become cutting-edge innovation
partners, some firms install organizational
units in technological hotspots. Alterna-
tively, specialized consulting companies
can be employed to search for new tech-
nological knowledge.
Examples: BMW has set up a listening
post in its Group Technology Office in
Tokyo (considered a hub for consumer
electronics). BMW pursues a similar
approach in product design innova-
tions with ‘Designworks’ set up in Palo
Alto and Singapore. Similarly, Deutsche
Telekom is using external technology
scouts, predominantly in US hotspots
on the East and the West Coast.
>> 06. Scientific Advisory Boards
To support the firm in spotting and assess-
ing technological trends some firms have
set up Scientific Advisory Boards. Usually
these are cross-disciplinary groups of high-
calibre experts from specific research fields.
Example: Henkel has set up a Scientific
Advisory Board in its Laundry Case di-
vision with members that have expertise
in molecule interface chemistry, hygiene,
polymers, colloid chemistry, surfactants,
fibres, catalysis, biotechnology and der-
matology.
>> 07. University co-operation
Close co-operation with universities is an
important way to absorb the newest re-

1919
FINDING
THE MOST RELEVANT
OI APPROACHES
In defining the most relevant open ap-
proaches to innovation the firm needs to
evaluate the list of potential OI approaches.
This list, as described above, should include
approachwes already being used by the firm
and relevant best practice from other firms.
Four questions can be used to filter out the most suitable open ap-
proaches to innovation out of this list.
1. ARE THE APPROACHES
ALIGNED TO THE
INNOVATION STRATEGY?
In order to contribute fully to the firm’s innovation performance, the
firm’s OI approaches need to be aligned to its innovation strategy.
If the firm has a detailed innovation strategy, this is the yardstick to
measure the relevance of a particular OI approach.
CHART 6.Simplified innovation strategy model
sharing and mutual inspiration and hence
to a significant boost in innovation capacity.
Example: DSM’s Chemelot industrial
park is one of the largest multi-company
communities in Europe. On an area of
ca. 8 square kilometres more than 80
companies are co-innovating in intelli-
gent chemical materials. Another exam-
ple is Philips Semiconductor’s MiPlaza,
where an ecosystem of global compa-
nies, start-ups, research institutes and
entrepreneurs share a joint infrastruc-
ture (ranging from basic cafeterias to
cutting-edge labs) and form a cradle of
innovation and business creation.
>> 19. Competitive innovation race
Competitive innovation races are an ap-
proach to actively source long-term in-
novations from pre-selected innovation
partners. Within a competitive scenario
the best firms receive invitations to enter
joint development.
Example: German car maker Volkswa-
gen has conducted more than 20 com-
petitive innovation races with more
than 100 suppliers through its ‘Forum
Innovation’. Its subsidiary Audi follows
a similar approach which it calls ‘Audi
Value Management’.
>> 20. Supplier in residence
An interesting way to co-innovate with
suppliers and to absorb their technologi-
cal expertise is to invite scientists from a
particular supplier to work on a particu-
lar technical/scientific issue with the firm’s
scientists in a lab on the client’s premises.
Example: Global skin care leader, Bei-
ersdorf, has ‘Incubation Labs’ and ‘Proj-
ect houses’ to co-innovate with suppliers
at early and later stage phases of the in-
novation funnel.

2222
IS YOUR
ORGANIZATION
READY?
Before the firm launches a major initiative to define its
OI portfolio and start its implementation it is help-
ful to check on the readiness of the organization. The
questions below may help.
IS THE INNOVATION PERFORMANCE OF THE
FIRM SEEN MORE AND MORE CRITICALLY?
In many cases firms started opening up their innova-
tion when shareholders questioned the innovation per-
formance (measured e.g. by new products additional
revenue per R&D Euros). In many situations the rising
costs of R&D and declining number market successes
are seen as indicators that the firm’s innovation op-
erating model has reached its limits and a more open
approach is needed.
You should prepare for these discussions by looking
at OI strategies of global benchmarks, of competitors
and of firms from similar industries in order to get an
understanding of the opportunity space and potential-
ly relevant approaches to OI.
ARE YOUR FIRM’S EXISTING OI
APPROACHES GOOD ENOUGH?
Firms embarking on OI do not usually start from zero
– they have usually taken certain steps. Usually there
are also some functions that are working on an open
model of innovation. It is important to recognize these,
but it is also important to analyse whether the firm’s
‘installed base’ is good enough.
In order to fully exploit the potential of OI you should
take an unbiased look and benchmark your firm.
You should also analyse which of the existing open
approaches to innovation produces a significant and
value-adding inflow and look at the efficiency of the
current processes to absorb external knowledge.
DOES YOUR FIRM HAVE A
BROAD VIEW OF OI?
More and more firms from different industries are in-
creasing the openness of their innovation by imple-
menting OI on a large scale. A number of firms have
found that impulses and ideas for OI approaches came
from industries with similarities in terms of research
structures, innovation funnels, consumers, sales chan-
nels and supply chains. A FMCG firm, for example,
found that the approach of a Pharma firm to attract
academia into its innovation ecosystem had many ele-
ments that could be transferred.
Within your firm you should install a system for moni-
toring OI approaches in other industries (using e.g. a
corporate Wiki in the Intranet). It is a good idea to
arrange cross-company/cross-industry workshops on
best practice, with companies from other industries
and especially where there are no major concerns re-
garding confidentiality.
ARE YOUR AWARE OF YOUR
COMPETITORS’ INITIATIVES TO BUILD
THE BEST INNOVATION NETWORK?
A key competitive advantage for the firms is its innova-
tion power. In the context of OI this means in particular
the innovation networks built and managed by the firm.
Once leading business magazines portray your firm’s
competitors as prime examples of OI it may already be
too late since then external innovators may choose these
competitors as primary innovation partner.
Your firm should actively build innovation networks and
use suppliers, academic experts and industry experts as
listening posts to find out about competitors’ OI ap-
proaches – and those of firms in comparable industries.
ARE INTERNAL PROCESSES IN
PLACE TO SUPPORT OI?
Apart from new processes such as ‘partnering’ which
include the identification new innovation partners and
managing the firm’s innovation ecosystem, a range of
already existing processes needs to be aligned with a
more open approach to innovation. These supporting
processes include management of portfolios and pri-
oritization of innovation projects through Stage Gates.
Your firm should look critically at these processes, ex-
ploiting external expertise such as consultants or
benchmarking partners from other companies.

2525
1. JUDGE WHETHER YOUR EXISTING
INNOVATION APPROACH IS GOOD ENOUGH
Authors comment:
Generally there are two motivations for opening inno-
vation. The first is dissatisfaction with the results of
the existing management of innovation (measured by
e.g. the revenue share of new products, the innovation
level of the most recent new products, or the time and
resources needed to develop and commercialize new
products).
The second is the strategic decision to shape the way
that innovation is conducted in the firm’s industry re-
spectively respond to changes in the innovation envi-
ronment.
Question for the reader:
How sure are you that the way your firm innovates now
will be good enough to sustain your innovation posi-
tion in 3-5 years’ time?
2. BE CLEAR ABOUT WHERE THE FIRM
SHOULD INNOVATE OPENLY
– AND WHERE IT SHOULD NOT
Authors comment:
OI is a powerful lever for increasing innovation perfor-
mance in the firm. It improves agility, performance, ef-
fectiveness and the risk position. However, there must
be a conscious decision about where to innovate open-
ly. In areas where the firm is a global leader it would be
unwise to share valuable insights.
To determine the areas where OI would increase the
firm’s competitive position you should examine the
firm’s technology fields, business fields and value chain.
Do you have an unbiased view of the competitive posi-
tion of your firm in its technology fields, business fields
and business processes? Are you clear about where
complementary external expertise would be helpful?
What time horizon would be most suitable for OI in
these areas?
3. ASSESS THE FIRM’S EXISTING
OPEN APPROACHES TO INNOVATION
Authors comment:
OI is not new. Every firm has open approaches to in-
novation. However they may not be good enough. Fre-
quently these approaches are based on old decisions,
existing networks and organizational inertia – not
unbiased assessment and a green-field approach in the
context of the current and expected innovation envi-
ronment.
Your team should make an inventory of the firm’s exist-
ing open approaches to innovation. As mentioned in
step 2, this inventory should span all technology and
business fields and the whole value chain. You may
then want to critically assess this inventory and judge
the agility, effectiveness and risk position of your firm’s
existing open approaches to innovation.
Do you have a complete list of your firm’s existing open
approaches to innovation? Are you convinced that ev-
ery approach is adding enough value with respect to
improved agility, effectiveness and risk position?
4. BE INSPIRED
– LOOK FOR PROVEN OI APPROACHES
AND EXCHANGE EXPERIENCES
Authors comment:
After your team has compiled the list of the firm’s OI
approaches you should look around for proven ap-
proaches outside the firm. This will usually involve
looking beyond the boundaries of your firm’s indus-
try. Part 3 of this tool mentions 20 best practice ex-
amples – these could be a good starting point for your
search.
It may be helpful to engage in practitioner networks
that discuss practical experience. There are a number
of these practitioner circles, usually involving OI man-
agers from firms in various industries. Some of these
networks require paid membership. The author has
set up a free Open Innovation expert circle whose cur-
rent 30 participants belong to leading firms (e.g. SAP,
Lufthansa, Bosch, Beiersdorf) and smaller but highly

To order please visit
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– a series of best practice articles for innovation management practitioners created
in collaboration with experts in the ﬁeld of innovation management from leading
companies, business schools and universities.

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