Question :  If you are looking for ideas to solve a challenging problem, what should you do?

Answer : Go out and shop for it. 

Seriously, go shopping for ideas. P&G does it, so do Du Pont, Unilever, Nokia, IBM, Philips and many other big names. But why go out there to find help when you can solve it in house? After all, those are all big companies with very deep pockets; they don’t need to, least of all Procter and Gamble, better known as P&G.

Formed in 1837, P&G is the 8th largest corporation in the world by market capitalization, its 2008 revenue is a whopping US$83 billion, employs 138,000 people and 14th largest US company by profit. It has been credited with many innovations including brand management and of course, the “soap opera”. At the back of all that superlative numbers, P&G operates one of the largest, if not the greatest, research and development outfits in corporate history. It employs 7,500 people, spends 4.8% of its year 2000 revenues on it, that’s close to US$2 billion!

So why go out when you already have the best with you? Here are three really good reasons.

The first has to do with efficiency. Innovation is an expensive affair. And US$2 billion is a lot of money. Companies like P&G are finding it increasingly difficult to justify its R&D value as product life cycles get shorter and shorter, thanks to globalization. And if R&D success defined as the dollar put in versus dollar earned, the law of diminishing returns truly applies here. So what’s the solution? Reduce the time and the cost of new product development by working with people and companies outside of your organization.

The second has to do with risk. Innovation is expensive because it’s a risky venture; it is “a shot in the dark” as some would put it. Not all new ideas that make it through the R&D process become successful products, if it even gets through at all. Moreover, you have to have sufficient number of successful products out there to cover for the “R&D losses” from the duds. The risk can be reduced by tapping into a network out there to bring in proven solutions which you do not have or own or better yet, the ones that you do not even know exists!

The third and perhaps the most important is the notion that “no single company can know everything”. Not even the industry leader like P&G that has a lot of money to throw at R&D. Knowledge today is distributed across companies, universities and web-based communities. No matter how well funded and expert an R&D operation is, it cannot compete with a linked-up scientific and user communities.

This new wave of shopping for ideas outside of the organization is known as “open innovation”. Base on the belief is that no single organization can know everything, Professor Henry Chesbrough first coined the term in his book titled “Open Innovation: The New Imperative for Creating and Profiting from Technology”.

Published in 2003, Chesbrough dramatizes the compelling case for Open Innovation with the following observations:

• "Not all the smart people work for you. There is a need to work with smart people both inside and outside the company.
• External ideas can help create value, but it takes internal R&D to claim a portion of that value for you.
• It is better to build a better business model than to get to market first.
• If you make the best use of internal and external ideas, you will win.
• Not only should you profit from others' use of your intellectual property, you should also buy others' IP whenever it advances your own business model.
• You should expand R&D's role to include not only knowledge generation, but knowledge brokering as well."

In contrast, the old school of “Closed Innovation” where products are thoroughly researched and built in house does not work anymore – at least not for P&G, who needs to sustain its rate of growth to keep ahead of its competition. Recent technology explosion was starting a lot of pressure on the R&D budget, its number of new products that met the financial objectives dropped about 35% and its R&D costs were rising, fast.

Realizing that P&G cannot meet its growth targets by throwing more money into R&D, the management decided to change the way they innovate i.e. innovating the way they innovate. The Internet also came at an opportune time and it allowed universities and government labs to get connected, form partnerships and to commercialize their researches. Seizing the opportunity, P&G launched its “Connect and Develop” or C&D innovation portal in 2002, eventually linking to some 70 technology entrepreneurs and its 15 suppliers with a combined R&D staff strength of 50,000 – an enormous source of innovation. Through the portal, people can view description of problems and submit their ideas and solutions for evaluation.

P&G is not alone, other forward-looking companies like IBM and Eli Lilly were also beginning to experiment with the concept of open innovation, leveraging one another's  and even competitors' innovation assets—products, intellectual property and people.

Next: Does open innovation work?

Article by: Gilbert Chang