In the world of technology, new ideas rule. But that doesn’t mean companies should keep their research labs under lock and key. Henry Chesbrough, a professor at the Haas School of Business at the University of California, Berkeley, has spent years documenting the benefits of “open innovation.” Chesbrough recently told Tom Simonite, Technology Review’s IT editor for hardware and software, why it works.
TR: What is open innovation?
Chesbrough: It’s the idea that companies should make greater use of external ideas and technologies in their own business and allow their own technologies and ideas to be used by others in their business. The term originated in 2003 when I published my first book on the topic.
What benefits does this approach offer compared with keeping everything in house?
If you bring outside things into your organization, you reduce your time to market, because you can work with things that have already undergone some level of development. You can also share some of the costs of development.
In the other direction, sharing ideas and technologies from your own business can open up new revenue streams—for example, if you license something or spin it off into a new enterprise.
Are these ideas scary to businesses used to carefully keeping new ideas to themselves?
Companies don’t like to compete with their own [ideas]. They consider it selling to the enemy. Companies can more easily see the benefits of bringing in external ideas to their company. [But even that faces the barrier of] Not Invented Here syndrome. It stems from arrogance—the feeling that if something comes from outside, it can’t be that good, because if it was, it would have been developed in-house.
Can you give an example of a company that successfully opens its new ideas to others?
A great example is Procter & Gamble, which has a policy they call “Use It or Lose It.” Three years after one of their products ships with a new technology, or five years after a patent issues, even if they don’t use it in the market, that technology is allowed to be used by others as well. It forces a certain speed on the process of evaluating their technologies.
One successful strategy is keeping a great idea to yourself for a while and then letting it be used by others only when you’ve moved onto the next one. I call that turning competitors into happy followers.
In economic terms, why does open innovation work?
When you look at the fundamental economics, a company’s R&D is actually a monopoly: it’s the only one that can supply new ideas and technology to the business. The business unit is a monopsony, a single buyer, the only buyer of new ideas and technologies.
There are a lot of good economic reasons that monopolies and monopsonies are inefficient. They’re not very innovative either, because there are big incentives for delay and slowing things down. Open innovation breaks down those monopolies and monopsonies and introduces competition for both sides.