The intriguing relationship between the pandemic and Open Innovation

The pandemic has produced enormous digital acceleration. Gartner estimates that the results usually achieved in 5 years were achieved in 2020 alone. New digital habits such as eCommerce, software-as-a-service, online education, smart working and telemedicine continue to increase, albeit at different speeds. Also, consider the cutting-edge methods used to quickly identify the vaccine and new drugs for Covid-19. The experience has led to a search for better technologies, a trend that offers attractive opportunities for companies capable of providing them.

Public and private companies all over the world have experienced an important moment of discontinuity and have had to adapt to a change in the behaviour and consumption styles of customers, to different ways of working, interacting and doing business. The result is an interesting dynamic that has led to new partnerships and alliances to pursue opportunities, some unprecedented, strengthen supply networks and expand the markets served.

For all the above reasons, the Open Innovation model has been revived with great impetus. The first definition of Open Innovation dates back to 2003, in Henry Chesbrough's essay “Open Innovation, the new imperative for creating and profiting from technology”: “Open innovation is a distributed innovation process that involves flows of knowledge that cross the boundaries of the organisation for both monetary and non-monetary reasons in line with the business model”. The author – a professor and Executive Director of the Garwood Center for Corporate Innovation at the Haas School of Business at the University of California - paraphrasing this definition wrote: ”Open Innovation is the antithesis of vertical integration, in which you do everything on your own from within your own four corporate walls. It’s a collaborative process that involves introducing external knowledge for your innovation work and, likewise, allowing ideas not used in your organisation to emerge and be adopted by others in their innovation work”. However, it cannot be said that the Open Innovation model enjoyed immediate success in Europe, in particular in Italy. Even though the way R&D is managed in companies, by relying only on internal resources (employees, patents, company know-how), the results of specific tests and huge capital investments in the laboratories of those companies, had already shown their limitations well before the pandemic.

While this alternative way of innovating, which also uses sources and resources outside the company, failed to take hold in the first 20 years of the 21st century, it has now become imperative. The unprecedented acceleration of the technological world means that there is fierce competition, which in turn means that no one can afford the luxury of going slowly and running the risk of being excluded from what is happening globally.

Closed innovation is still very in vogue and consists of developing new products and services in a company using only that company’s resources, both in terms of skills and financial means. Everything is contained in the R&D team, then other company functions manage the production, marketing and distribution. The entire process is very controlled.

In the past, companies invested more in internal research and development than their competitors, hired the best professionals and, thanks to the resulting success, reinvested in R&D to make new, revolutionary discoveries. However, two significant factors undermined the virtuous circle that has always allowed this model to work:

  • the increased mobility of people working in research and development, which has made it very difficult for companies to control their ideas and skills;
  • the growing availability of private venture capital, which has helped finance new businesses.

In short, if a company that has funded research that leads to promising discoveries fails to pursue them on time, the people involved could implement the project on their own, for example by founding a venture capital-funded start-up.

A very significant difference between companies that use Closed and Open Innovation can be found in the different ways of evaluating ideas:

  • “false positives”, i.e. bad ideas that initially seem promising are easily eliminated in both innovation models;
  • "false negatives", ideas that originally seem like failures, but which later turn out to be valuable, are not taken into consideration by the closed innovation model, while they retain hope in the open model, in which more experimentation and risk can lead to the possibility of unearthing success in that which is not immediately evident.

A company that is focused on the closed model does not take risks in areas that are not similar to its way of working and the products/services that are part of its business. This approach proves counterproductive when an idea that has been studied at length and is subsequently abandoned turns out to be disruptive and highly successful, with enormous commercial value.

Do these reflections, therefore, demonstrate the superiority of the Open Innovation model? No, but they do suggest that it is advisable to adopt different approaches depending on the challenges you want or have to face.

As for the company's core products, a Closed Innovation approach, which constantly monitors what is happening outside the company, maybe ideal.

Open Innovation is more suited to experimenting with products developed using new technologies because it can benefit from plenty of knowledge that needs to be used quickly to generate value for the various partners (start-ups, universities, research centres and other external organisations).

In short, it is possible to state that the various activities performed by a company can be arranged along a continuum, from substantially closed to completely open. At one extreme, there’s the Not Invented Here (NIH) syndrome, which afflicts many successful organisations, causing them to reject, rule out products that were not conceived by the company, without realising their potential. At the other extreme, there’s the open approach to these innovations.

Nowadays, knowledge is widespread and there is a great need for innovation, also in light of the changes brought about by the pandemic: we cannot miss the opportunity to experiment with new ideas, supported by a logic of open innovation that combines external knowledge with internal research and development. It is this shift in focus that offers new ways to create value. Companies still have to convert - albeit with difficulty and no little effort - the promising results of research into products and services that satisfy their customers’ experiences.

In short, the companies that will end up being successful will be those that can find the perfect balance between Close Innovation and Open Innovation, but which will also be able to subvert it, when necessary. Closed Innovation is still the best option when the aim is to improve operations and processes. Open Innovation, on the other hand, creates greater value when there’s a need to be more disruptive and activities or products need to progress effectively and quickly.

What is your company's innovation strategy?

Which one would you like to be chosen for future projects?