Open Innovation: Strategic Collaboration for Digital Transformation. The fifth part of Transforming Organizational Culture for Digital Transformation Success explores the importance of open innovation to support digital transformation (DT, DX, Digital Transformation). Learn strategies for evolving R&D and expanding your global business through partnerships and collaboration.
Open innovation: the new power of DX
One methodology we hear a lot about in the DX space is open innovation. Open innovation, a concept first proposed by Professor Henry W. Chesbrough of the University of California, Berkeley, refers to the use of external resources to solve the technologies and ideas needed for corporate innovation.
This may make you wonder how it differs from outsourcing, but from an R&D perspective, open innovation is not simply outsourcing, but rather a way for a company to focus on its own capabilities in the areas it focuses on, while at the same time utilizing external technologies to reduce the burden of overall R&D and maximize its performance. In other words, it is a way to reduce the burden of development and increase the speed by actively utilizing the technologies of external partners in areas that are partially necessary or already mature in R&D projects.
Scaling R&D and the evolution of open innovation
In the early 2000s, when open innovation emerged, it was focused exclusively on R&D. However, since the mid-2000s, the concept has expanded to cover all areas of the enterprise, including production and services. In the case of DX projects, with the continuous emergence of new technologies such as artificial intelligence, big data, and the cloud, there are limits to doing everything alone, and it is necessary to secure not only technical expertise but also to discover ideas for products and services.
Open innovation is becoming increasingly important not only in terms of securing technical expertise but also in terms of discovering ideas for products and services. Customers’ needs are becoming more and more diverse, and responses to them need to be fast, so companies are developing new products and launching services faster and faster, and the demand for open innovation is getting higher and higher.
Finally, there is the expanding opportunity to do business globally. In the case of domestic business, it was not difficult to build the entire value chain within one company because all areas were familiar. However, for a global business, it is difficult to do everything by yourself. In this case, it is important to choose an open innovation strategy with partners who can complement it.
How to practice open innovation: Partnerships and collaboration
Open innovation is sometimes understood as simply collaborating with external partners, but it can also refer to strong collaborations that are not just a memorandum of understanding (MOU), but have strong legal rights and obligations, such as mergers and acquisitions of companies with lesser capabilities. In partnerships, there are various categories of collaboration, such as technology, production, and sales, and it is possible to jointly develop technology licenses and supply some parts, or to produce OEM products and create co-branded products and sell them to each other.
In other words, there are various forms of alliances, including equity investment, strengthening the relationship between each company through the exchange of minority stakes, or establishing a new entity in the form of a joint venture (JV) and investing in each other, all of which can be called open innovation. And when establishing a JV, it can be a technology-based JV or a sales-oriented JV. This is also a form of open innovation.
What are some examples of open innovation success stories? One example of a business success is P&G’s open innovation program, Connect and Development (C&D). CEO Alan George Lafley, who led P&G until 2015, set a goal for the company to get 50% of its innovation from outside sources, and broke down the boundaries between the internal 7,500 R&D people and the external 1.5 million R&D people by giving them access to each other as if they were part of the internal R&D organization.
As a result, a wide variety of products were brought to market under the actual P&G brand, and some were quite successful. Tide (detergent), Pampers (disposable diapers), Oral-B (toothbrushes), Gillette (razors), Duracell (batteries), Crest (toothpaste), and Pringles (snacks) are all products that came out of this open innovation program. What’s more, in 2000, when P&G began implementing its C&D program, only 15% of its new products were created externally; by 2007, that number had grown to more than 50%.
As you can see, open innovation is being recognized as a solution to the problem of sustained growth for established companies. This is especially true in Silicon Valley in the United States. Big tech companies like Google and Amazon have their core business, but they are constantly making acquisitions and testing new business models to prepare for the future. An example of this is AlphaGo, which acquired DeepMind.
Even though Google has a high level of technology in artificial intelligence, the fact that it found a technology in an area that it did not have early on and acquired a company that had only been established for about four years by investing 700 billion won is very meaningful from an open innovation perspective. Of course, this is not to say that all companies in Korea should aim for the same type of operation as P&G and big tech companies. However, if you are setting DX as an important direction in the future and want to establish it as a sustainable innovation tool within your organization, it is something you should definitely think about.
Open innovation for global business expansion
While many organizations will leverage outsourcing when executing DX, it’s important to start with a clear idea of what you’re looking for in a partner and how you want to work with them. In the previous section, we focused on the extent to which DX should be outsourced. Once you have a clear idea of who you want to partner with for open innovation and how you want to leverage their capabilities, new solutions can emerge, such as equity investments in the partner company or joint ventures.
The DX journey is not a one-man show. Furthermore, unless the DNA of an existing company is IT, it will be at a significant disadvantage compared to an IT company, even if it has the capital. To compete with them, it is very important to collaborate with partners who have capabilities that I do not have.
