It is of the utmost importance to have an understanding of the difficulties and potential challenges of Open Innovation before this methodology can be deployed. This also contributes to a better understanding of the concept.
West and Gallagher (2006) identified three major challenges regarding Open Innovation: finding creative ways to exploit internal innovation
incorporating external innovation into internal development, and motivating outsiders to supply a steady stream of external innovations.
Figure 20 graphically represents the aforementioned challenges. Each challenge is discussed in detail in the following sections.
Figure 20 - The challenges of Open Innovation in the R&D process
[West & Gallagher, 2006]
4.3.1 Exploiting internal innovation
Internal innovation can be applied in various forms to maximise its advantages. The most important application, according to West and Gallagher (2006), is to generate innovations that are internally commercialised in the organisation. This is the proprietary approach to R&D, where an idea is internally formed and converted into a product or service that can be exchanged to increase the value of the organisation.
Given the high failure rate associated with companies who still rely solely on the traditional R&D model as the only source of innovations fit for commercial sale, other creative uses for internal R&D will have to be used. As proof of the lack of success of the traditional R&D process, the pharmaceutical company, Pfizer, set itself an aim of reducing its failure rate from 96% to 92% on new drug development (Simmons, 2003).
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According to Garnier (2008), the R&D spending by big US pharmaceutical companies has risen from $2bn in 1980 to over $43bn in 2006, but with the same percentage of new drugs being approved now by the FDA (Federal Drug Association) as was the case in 1980.
Generating innovations to be externally commercialised (outside the traditional innovation process) through the use of licensing patent portfolios, provides a revenue-generating form of income for innovations that would otherwise be stagnant with no profitable future.
The introduction of Intellectual Property (IP) and patent trading spaces, like jet2.com (www.jet2.com) and Innocentive (www.innocentive.com, discussed in section 4.4.4) has improved the efficiency and ease with which this can be done. Also, the creation of industry-specific patent pools provides a creative way to maximise the income, thus increasing the success rate of the R&D process.
Bekkers, Duysters and Verspagen (2002) provide the example of the patent pool created by European mobile phone manufacturers to establish the GSM standard during the previous decade. The co- operation of the independent manufacturers resulted in Europe having an advantage over their Asian competitors – if it were not for the sharing of internally created R&D and knowledge within the network, the situation would not have been so advantageous to the European producers.
These examples illustrate once again the existing challenge to improving the success rate of the implementation phase of the innovation process (as described in section 2.3), while the example of the European mobile phone manufacturer network provides a possible solution to this challenge.
It is thus evident that the externalisation of internal innovations could pose a problem, but there are creative means to overcome this challenge.
4.3.2 Incorporating external innovation
The second proposed challenge concerns the difficulty of incorporating external innovation. The greatest challenge is for organisations to be able to identify, understand and selectively choose which external innovations to incorporate in their business.
If an organisation is to succeed at this, it will thus need the infrastructure as well as the absorption capacity to be able to filter through the available, appropriate external innovations.
A solution will have to be found to ensure that customers are included in the selection (filtering) process. The inclusion of the end-customer in the selection process will result in more accurate offerings, as the persons who will eventually use the product will purchase it, since they chose to have it in the first place. This is portrayed by the example of Threadless in section 4.4.2.
The use of external, or Open Innovations, does not equate to the removal of all internal research and development. In fact, for an organisation to be able to make use of external innovations, a sound internal innovation process and R&D methodology need to be in place – this is required to ensure the
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absorption and filtering capability needed when incorporating external innovations into the organisation.
The level of incorporation of external innovation should be decided before an Open Innovation exercise is commenced. This should ease the selection (filtering) process, as it will be known beforehand to what extend external innovation should and can be incorporated. Pisano and Verganti (2008) suggest that an organisation can have a mixed portfolio of open and closed innovation models. According to them, the deciding factor is whether it fits in with the organisation’s strategy. This will be discussed in more detail in section 5.1.
4.3.3 Motivating outsiders to contribute
West and Gallagher (2006) argue that the motivation to contribute to Open Innovation (or spillovers, as they call it) can be viewed on two levels – individual, and organisational.
On the individual level, receiving spillover contributions without rewarding the contributor financially can prove to be a challenge, as other forms of reward often need to be found. Inexplicably, even without financial reward, given the correct circumstances (discussed later), organisations are experiencing that individuals provide spillover innovations or inputs.
Von Hippel (1988) states that customers will often share their innovations with producers if this will result in improved products in the future, as is illustrated by the example in section 4.4.2.
Referring to open-source programming, a clear example of individual spillover contributions towards a single entity, three factors have been identified to be responsible for contributions made by individuals (West & Gallagher, 2006). These drivers state why individuals will contribute towards a collaborative project or product:
Direct utility – either to the individual or to the organisation Intrinsic benefits – learning a skill, or personal fulfilment
Signalling (recognition) – gaining the respect of one’s peers or employer.
The research found that in the example of open-source programming, and more specifically user- modified gaming, individuals will contribute given the following criteria:
Minimised technical obstacles – individuals will contribute when they can perform their alterations on a well-established proprietary innovation provided by the organisation.
Creating an infrastructure – a well-established infrastructure will promote individual activity and additions. (This process, called platforming, will be discussed in section 5.2.)
Recognition for contributors – contributors want to be recognised. These recognitions relate to the abovementioned drivers, independent of the financial value thereof.
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On an organisational level, spillover contributions are more organised, often governed by regulations and contractual agreements. The challenge here lies with an organisation being able to identify potential profitable spillover agreements, and sharing Intellectual Property in such a way as to not put the organisation at any disadvantage or risk.
It is suggested by West and Gallagher (2006) that organisations will often share an innovation or other Intellectual Property to gain recognition and increase demand for another product in their product line. These variations in incentives (remuneration) will later be incorporated in each Open Innovation model. The differences in approach between individual and organisational level spillovers will also be influential when referring to the different Open Innovation models.
The various recommendations made by West and Gallagher (2006) depict the dynamic nature of the application of Open Innovation in an organisation. It illustrates the fact that each installation of an Open Innovation model will prove to be different, as the factors that influence the installation of the model will differ for each installation in terms of level of openness and type of recognition offered. Although these challenges provide only an introduction to the difficulties associated with Open Innovation, it is clear that plausible solutions to the challenges can be found. It also shows the tremendous planning needed before an Open Innovation exercise can be commenced.
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