To build your capabilities and cast a wider net for ideas, you must figure out which of the three types of innovation strategies you already have — and design your R&D approach accordingly.
Finding and developing good ideas is what corporate innovation strategy is all about. That’s why the concept referred to as open innovation has dominated so many discussions about research and development during the past decade.
Every company and every line of business within a company can benefit from looking outside its organizational boundaries for innovative business ideas, for collaboration in developing those ideas, and for validation of those ideas in the real world of consumers.
Moreover, the benefits of actively pursuing open innovation have been clearly demonstrated.
Booz & Company’s research shows that companies with robust open innovation capabilities — including strong technology-scouting practices and cross-boundary collaboration — are seven times as effective as firms with weak capabilities, and twice as effective as those with moderate capabilities, in generating returns on their overall R&D project investment portfolio.
Some companies, most notably 3M and Procter & Gamble, have maintained leadership in their industries through renowned open innovation strategies, building links between inside groups and outsiders such as customers, inventors, academics, and even competitors.
Many companies are willing to build an innovation culture that is open to the ideas of outsiders, but it isn’t always obvious how to make the shift.
The basic problem is the isolation between open innovation and a company’s current R&D strategy. Most companies already have a basic, ingrained approach to innovation, tied tightly not just to generating ideas (which is comparatively easy) but to developing and executing them (which is the hard, value-creating part of innovation).
In short, if you are looking to build an open innovation practice, it will work only when you match your company’s efforts to look outside with the capabilities you already have on the inside.
Successful companies tend to choose one of three distinct approaches. They become Need Seekers, Technology Drivers, or Market Readers, and that choice, in turn, determines how they can succeed.
• A Need Seeker strategy directly engages current and potential customers to better capture their unarticulated needs, shapes new products and services, and strives to make the company the first to market with those new offerings.
An example is Stanley Black & Decker Inc.’s DeWalt division, a maker of power tools for professionals, which regularly sends members of its R&D group out to construction sites to research builders’ needs, observe construction crews in action, and test new products with them.
• A Technology Driver strategy follows the direction suggested by the company’s technological capabilities, leveraging its investment in research and development to drive both breakthrough innovation and incremental change, often seeking to solve customers’ unarticulated needs with new technology.
An example is the German technology giant Siemens AG, which spends 5 percent of its overall R&D budget on planning for the long term, and develops detailed technology road maps within individual business units.
• A Market Reader strategy monitors customers and competitors with equal care, but the company maintains a more cautious approach, focusing largely on creating value through incremental change and being a “fast follower” of proven concepts.
An example is the Visteon Corporation, which conducts well-designed research into market trends before investing in new innovations — such as reconfigurable digital displays for cars — but is prepared to move with full force and rapid speed when it discovers demand.
Research suggests that the three strategies deliver comparable financial success if tightly aligned with a company’s overall business strategy. But it also demonstrates that each of these innovation models requires a distinct set of innovation capabilities to succeed.
In light of these findings, companies that develop the appropriate innovation strategy must align it with their overall corporate goals and assemble a cohesive set of capabilities to gain a clear financial advantage. The key isn’t to be good at everything, but rather to excel at what matters most to your success.
That’s why open innovation is a critical capability only for Need Seekers and Technology Drivers. These companies rely on being early to market, with innovations rooted in either the latest technology or new customer insight. Need Seekers are continuously looking for ideas, often from customers, to drive incremental improvements in their products as well as to spur entirely new offerings.
Technology Drivers depend heavily on developing new, often untested, technologies that can be converted into products. Their success depends not just on importing fresh ideas from a wide variety of sources, but also on ensuring that the products that they do go on to develop will ultimately succeed in the marketplace.
And Market Readers?
These companies have built their strategy around a fast-follower model. They should focus on being strong in other capabilities, particularly in the stages of product development and commercialization.
Establishing Open Execution
Reaping the full benefits of open innovation is no easy task, especially for companies that have yet to venture into this often complex and tricky domain.
We typically divide the effort into five activity areas, which are addressed concurrently: organization, external relationships, culture, processes and tools, and incentives.
• Organization. No open innovation effort will succeed without the involvement of a senior-level executive to champion the program. An innovation office with access to a dedicated innovation fund should be established under his or her auspices. The office’s mission should be to seek out new ideas, and the office should put together two kinds of teams: some dedicated to developing and managing relationships with external partners; others, chosen from different business units, to organize cross-functional innovation processes.
• External relationships. The key to successful open innovation lies in establishing strong relationships with outside partners — whether they be universities, other companies, or even independent inventors and consumers — and developing systematic processes for surfacing and vetting ideas. Adequate intellectual property (IP) policies must be agreed on, policies that allow for the proper licensing of external ideas and make clear the conditions under which external partners can use that IP. But it is critical to ensure that such protections are not allowed to become legal handcuffs that restrict opportunities via an excessive aversion to risk.
• Culture. Promoting open innovation may present a set of internal challenges. Companies that struggle to innovate, especially Technology Drivers, tend to lack a truly collaborative cross-functional environment.
Success depends on fostering a culture that expects and rewards the free exchange of ideas across divisions and geographies, making it easy to disseminate ideas and gain access to ideas from other groups.
To build a collaborative culture and move away from the not-invented-here syndrome, start by changing behaviors; attitudes will follow.
Companies that do this well have typically established a team for designing new practices.
For example, the team might design and establish an active internal venture capital investment scheme, to review ideas quickly and then move right away to vetting and acting upon them if they are worthwhile. This in itself will give innovators better reasons to share their ideas.
• Processes and tools. Companies that make the most of open innovation are highly disciplined in their own use of technology, and in their process innovation. They communicate frequently and use consistent processes, backed up with simple, flexible IT tools, to track new ideas, select the best ideas, manage the development stage, and link R&D with other functions such as marketing and manufacturing. Some companies are turning to social media tools to promote internal and external collaboration.
• Incentives. Once discovered, good ideas need to be captured effectively. Creating solutions that benefit both you and your partners is critical to successfully developing external ideas. Internal budgets for divisions and functions should be tied in part to those areas’ innovation efforts, as should individual incentives. This will require a process for developing and tracking key innovation metrics.
Each of the three types of companies has its own approach to these activities, and gains leverage from them in a different way.
For example, Need Seekers may convene cross-functional groups that can integrate their separate ideas into common innovation practices.
That might not work so well for Technology Drivers, which are typically working with highly specialized and intensive R&D practices, and which may need intensive ways to train their marketing teams and bring them on board (and which may have outsourced manufacturing altogether).
Although the details will vary, the basic message is clear:
Companies have an enormous amount to gain from open innovation.
They will, however, realize those gains only if they think of this new approach as an innate part of their distinctive R&D skill — a capability that, in the end, gives them a distinctive edge.
Fred J. Palensky, chief technology officer at one of the world’s most innovative companies, explains how to foster the ongoing cross-pollination of ideas.
As part of Booz & Company’s annual study of the innovation strategies of the world’s highest-spending companies on R&D, the firm conducted a survey that asked senior innovation executives to vote for the world’s most innovative company.
The third most frequently cited innovation leader was 3M, right behind Apple and Google. That came as no surprise, given 3M’s track record of developing smart, successful new products.
3M’s ability to keep churning out new innovations is very much dependent on the company’s long-standing commitment to open innovation, both internal and external.
Fred J. Palensky, 3M’s chief technology officer, discussed the many ways his company creates and develops ideas through open innovation, and explained why its highly collaborative culture and innovation leadership are essential to the process.
S+B: Can you describe how 3M’s open innovation processes are organized?
PALENSKY: The reason 3M is what it is today — a company that has developed organically across consumer, electronic, transportation, industrial, safety, security and display, and electronic markets — is our shared, leveraged technology and innovation model. We assume that technologies and technological capabilities have no boundaries or barriers. Any product or manufacturing technology is available to any business in any industry in any geography around the world.
As the company’s senior technology executive, I’m responsible for the corporate research laboratories. I represent the entire technical community at 3M, which includes about 10,000 R&D people in 73 labs around the world. About 15 to 20 percent of those people work in corporate research, which is responsible for developing, transmitting, and supporting technologies throughout the company. I also head up the corporate technical operations committee, or CTOC, which ensures the development, health, sustainability, and transmission of 3M’s tech capabilities across all the businesses, geographies, and industries in which we operate.
We have 63 full-scale operating businesses in dozens of industries in more than 70 countries around the world. Each one of those businesses conducts its own research, while maintaining connections with all the other R&D operations throughout the company.
S+B: What enables the cross-pollination of ideas?
PALENSKY: We believe that no one business has everything it needs to conduct business in its marketplace without leveraging the rest of the company. So every single technical employee in the company has dual citizenship — they’re part of a particular business, lab, or country, and part of the 3M global technical community. We don’t restrict people from moving from one business to another, from one industry to another, or across country boundaries. Most of the people who run the businesses, the country offices, and the labs have been in five or six or 10 different parts of the company before. They’ve grown up inside the 3M culture. I myself have been at 3M for 34 years, and I’ve had 14 different jobs in five different industries and three different countries. I like to think of it as a movement of people and ideas that’s not mandated but officially endorsed.
S+B: 3M also has an active external open innovation program. Can you describe it?
PALENSKY: Our corporate labs are continually bringing in new employees and technologies from universities and other sources. And we collaborate closely with customers. We have 30 customer technology centers around the world, where our technical and marketing employees meet with customers and expose them to the full range of 3M technology platforms. We ask them what their technical issues, problems, and opportunities are, and whether any of 3M’s many different technologies can help them. The constant technical interaction is critical in creating new innovations.
S+B: Can you discuss a specific product that arose out of 3M’s open innovation process?
PALENSKY: Really, all of them. To take one example, we just introduced an entirely new kind of sandpaper — shaped, fine-grained, self-sharpening, structured abrasives. The mineral technology came from the abrasives division, some of the shape technology came from optical systems, coating technologies came from the tape division, and mathematical modeling and fracture analysis came from the corporate research center. Altogether, the abrasives division used seven different technologies to create the product, only two of which came from the division itself.
S+B: What role does culture play in sustaining open innovation at 3M?
PALENSKY: I think our success is driven much more by culture than it is by structure or organization. We’ve been practicing open innovation at 3M throughout our history. The company started out making sandpaper, and our salesmen sold our products to all kinds of people. When they visited auto-body shops, they watched workers struggle to paint fine lines and borders. So the salesmen went back to the office and talked about the problem. That was the beginning of our masking tape business. That’s the culture that has sustained us ever since.
But we also actively support that culture. All of our technical people at the corporate labs dedicate about 15 percent of their efforts toward programs, interactions, learning, and teaching in areas outside their particular responsibilities. In addition to the various programs we’re developing at the corporate labs, we are working on more than 300 joint programs with various divisions and businesses. So, in addition to their corporate responsibilities, everyone is also a member of a team that is working alongside division members in either technology transfer or new product development projects.
All of this creates a community of collaboration, and it ensures that everybody has some skin in the innovation game. And because our senior leaders have grown up in this culture, they continue to nurture and protect this highly collaborative, enterprising environment. Cultures are unique and extraordinarily difficult to duplicate. And it takes a real effort to sustain them.
- Barry Jaruzelski is a partner with Booz & Company based in Florham Park, N.J., and is the global leader of the firm’s innovation practice. He focuses on the high-technology and industrial sectors, and specializes in corporate and product strategy.
- Richard Holman is a Booz & Company principal based in Florham Park, N.J., and a leader of the firm’s innovation practice. He specializes in highly engineered product industries such as aerospace and high technology.
- This article was adapted from “Casting a Wide Net: Building the Capabilities for Open Innovation,” by Barry Jaruzelski and Richard Holman, Ivey Business Journal, March/April 2011.
- (See “The Global Innovation 1000: How the Top Innovators Keep Winning,” by Barry Jaruzelski and Kevin Dehoff, s+b.)