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Inside Supply Management

COVER STORY

Closed and Open Doors of Innovation

Author(s):

John Yuva
John Yuva is editor of Inside Supply Management®

March 2011, Inside Supply Management® Vol. 22, No. 1, page 26

"Innovation — any new idea — by definition will not be accepted at first. It takes repeated attempts, endless demonstrations and monotonous rehearsals before innovation can be accepted and internalized by an organization. This requires courageous patience."
       — Warren Bennis, founding chair of the Leadership Institute at the University of Southern California

The Merriam-Webster Dictionary defines innovation as "the introduction of something new." Whether it's developing a new product or service, or improving an existing offering, innovation is the cornerstone for remaining competitive in the marketplace. Innovation occurs in two environments — closed and open. As product and service needs evolve, organizations must examine both closed and open innovation models to solve their business challenges. While a majority of organizations relied on a closed model a decade ago, today's customer-centered supply chains are driving open innovation strategies.

How does your organization approach innovation? Often, the decision to have a closed or open model depends on the business challenge and circumstances. However, the maturity of an internal innovation process is also critical in the success of moving toward an open model. This article will examine several areas:

  • Defining closed and open innovation
  • Approaching innovation efficiently
  • Transitioning to an open model
  • Measuring open innovation initiatives.
Defining Closed and Open Innovation

How closed and open innovation are defined depends on the organization. Each is a technique that has its purpose and appropriate applicability to business challenges. An organization may prefer a closed innovation model for one initiative to protect its intellectual property, while another initiative may be "crowdsourced," where a large group or community is approached for ideas and solutions. Fewer organizations are subscribing to the "Not Invented Here" mind-set, where innovation is only to be trusted and implemented if it originates within the business unit or core team. In today's competitive environment, senior management and supply management professionals recognize the importance of external partnerships and innovation sharing.

Closed innovation. When innovation is solely developed and implemented by an internal business unit or core team, it's considered a closed innovation environment. Henry Chesbrough, Ph.D., adjunct professor and executive director for the Center for Open Innovation at the University of California, Berkeley, says closed innovation builds on the idea that if a business unit or team wants something done right, it must do it itself. It's a model of vertical integration and of strong central control.

"You have complete ownership of the activity because you did it from soup to nuts, from the beginning to the very end stages of the development process," says Chesbrough. "So, all of the knowledge and intellectual property developed along the way are owned by you entirely."

Where closed innovation has its drawbacks is in the ability to collaborate with a diverse knowledge base. Stephen Shapiro, innovation consultant in Quincy, Massachusetts, and author of the book 24/7 Innovation, says innovation relegated to a single business unit or team lacks diversity in thinking. The thought processes are often similar, which translates to less creativity. "Expertise is the enemy of creative thinking," says Shapiro. "In a closed model, everyone is breathing the same air, so there's no diversity and the solutions occur more incrementally." By comparison, the organization's culture must be open to outside ideas and not discount them or perceive them as a threat to internal competence.

Open innovation. When innovation involves the knowledge and participation of individuals outside a business unit, either internal or external to the organization, it's regarded as open innovation. This can occur in a variety of ways: 1) business unit to business unit, 2) crowdsourcing with internal employees, 3) collaborating with suppliers, 4) partnering with an external solution providers, 5) licensing/buying an existing solution and 6) crowdsourcing with the external public. What organizations cannot afford to do is overlook the options of an open innovation model.

Chris Thoen, managing director, global open innovation office for Procter & Gamble (P&G) in Cincinnati, says open innovation often occurs at the interface between different industries and business disciplines. Because P&G has diverse product platforms, the potential for open innovation and breakthroughs are likely within the company. "When discussions around new innovation begin, identify the activities that only your business unit or team can do," says Thoen. "For everything else within the innovation process, look for the partners (internal and external to the organization) that can accomplish the work that needs to be done better, faster and potentially cheaper."

Thoen adds that organizations should avoid an open model if a solid internal innovation process does not exist. Without the ability to process and prioritize outside ideas and solutions, organizations can become overwhelmed and overlook valuable opportunities. "If you don't have an internal system established, you have the potential to encounter roadblocks in decision-making when opening up innovation," he says. "You're essentially drowning the organization in too many ideas. Develop a well-tuned innovation process before you open it up to external innovation."

Approaching Innovation Efficiently

Closed and open innovation are techniques for organizations to solve their business challenges. However, these techniques mean little if the approach to solving challenges is not effectively developed and communicated. Shapiro explains that there's a clear distinction between the two types of approaches — seeking ideas and seeking solutions.

The idea platform involves organizations asking employees to offer suggestions to requests or questions — often stated in broad terms, such as ideas for a new product or strategies for reducing costs. On the surface, this approach seems efficient and effective. However, hundreds or even thousands of ideas can be submitted for a single question depending on whether it's posed in a closed or open innovation environment.

"The problem with the idea platform is that it creates a significant amount of noise (unwanted or poor ideas) and leads to extreme inefficiency," says Shapiro. "If you think about every employee providing suggestions, it may result in a number of really bad ideas. And someone has to sift through those ideas to determine if they're valuable. While there's merit in it, the idea platform is not as efficient a use of time or resources as other approaches might be."

What generates the most valuable results is defining a specific challenge for people to solve. Shapiro says challenges can evolve from employees, customer feedback or a business strategy. For example, how can the organization reduce its logistics lead time for customers in China? Issuing this challenge and others with a much more targeted question enables people (internally or externally) to respond with focused solutions. To manage responses, organizations can turn to idea management systems to sort and prioritize suggested solutions. "Ultimately, to become masterful at closed and open innovation, organizations must become masterful at defining challenges," says Shapiro. "Organizations must first recognize their ability to surface, frame and prioritize challenges and regard it as an important skill set. You can then choose to pose the challenge just internally with one small team, or ask externally, as well. However, you have to get the question right — if you ask the wrong question, it doesn't matter what innovation technique you use to solve it."

In many organizations, Shapiro says most employees are exerting energy trying to find solutions to problems that don't matter. That energy is better spent focusing on challenges and solutions that will move the needle for the organization. What challenge, if able to be solved, will create incredible value, such as revenue, efficiency and competitive advantage for the enterprise? For one company, that challenge came in the form of how to shake the fat from potato chips without breaking them.

This challenge was crowdsourced in an open environment, where the solution came from an unexpected source — a musician. By using sound amplification to shake off excess fat during the production process, the company was able to reduce the fat content of its potato chips. "The other advantage to having a challenge-based mind-set is that challenges are owned," says Shapiro. "When you say, 'this is a challenge we want solved,' there is somebody who is going to own it, fund it and resource it, so when a solution materializes, you can accelerate the implementation process."

Learning and Adapting to Open Innovation

Because more organizations are segmenting their supply chains and moving closer to the customer, open innovation is beginning to take hold. However, the shift from closed to open does not occur overnight. Thoen says the shift is an uncomfortable one for companies that historically have had a strong innovation culture. With the belief that the best ideas and innovations are processed internally, there's apprehension transitioning to an open model. "As companies continue to grow, however, they must realize there is a point where they're no longer large enough to do everything themselves," he says. This applies to large multinationals that must diversify their input and ideas externally to remain competitive.

Thus, a major factor in the success of open innovation is the commitment from senior management to look beyond the internal core team mentality. At P&G, its Connect+Develop (C+D) open innovation initiative drives its external partnerships. This is represented in the company's goals to enhance its open innovation efforts.

Bruce Brown, chief technology officer for P&G, says the C+D initiative opened the company's mind and door to external collaboration. "It changed our culture from 'invented here' to 'partnering for greater value.' We are looking to ensure that we're not just delivering more partnerships, but greater value through our partnerships. We want collaboration that creates innovation across all our business operations, from product development to logistics."

As Brown states, it's a mind-set change that has to permeate the entire organization. Thus, to generate innovative outcomes in an open model, employees must be recognized and rewarded for those efforts. Thoen explains that congruency and alignment between the open innovation mind-set and the recognition and rewards are critical. When P&G transitioned from a "Not Invented Here" stance to a "Proudly Found Elsewhere and Reapplied With Pride" mind-set, it needed to better recognize and reward employees for what they enabled in others and the innovations that were found outside, brought in and enhanced for market success. The focus required going beyond the individual innovator within P&G to employees who sensed and captured innovations outside the company. "You need to be certain that when moving from closed to open innovation, your reward and recognition systems are set up to drive those external behaviors," says Thoen.

Measuring Open Innovation

Regardless of the approach, organizations want to measure the outcomes and impacts of their innovation efforts. Measures not only validate the success of innovation strategies, but also whether the organization is taking the appropriate approach to solve its business challenges. Both Shapiro and Thoen share common and evolving innovation measures.

Solve rate, time and money. Shapiro says organizations want to balance solve rate, time and money. While these are three separate measures, each has an impact on the other. When organizations have challenges to solve, they want a high solve rate. Unfortunately, the typical solve rate for technical challenges is between 8 percent and 15 percent. This means a significant number of challenges go unsolved, costing organizations both time and money invested in those efforts. Often, it's the approach to innovation that affects the solve rate. Whether a challenge required a more closed or open environment, the people and method were not enough to solve it. With the right environment for the challenge, solve rates can increase to between 50 percent and 60 percent.

When a challenge is solved, determine how quickly it was done. This, of course, ties directly to the costs involved. "The advantage of going open, especially with challenge-based innovation, is that everyone is failing at the same time rather than in a series," says Shapiro. "It's happening in parallel and they're absorbing the cost of those failures. Open innovation collapses the time frame, it gives you more things to choose from and it reduces the cost significantly as it's distributed among all the players."

Signal-to-noise ratio. While organizations want ideas to solve challenges, sometimes too much of a good thing can have negative impacts. The signal-to-noise ratio measures the number of ideas for a particular challenge. Shapiro says for broad challenges, such as asking employees to submit ideas to improve revenue, there could be 1,000 submissions and only one good idea. This generates a significant amount of noise in the system that someone has to filter to find the one good idea. "If you design your innovation systems to be more efficient, ideally you'll get fewer solutions because it becomes a self-vetting process for people to only provide a solution that meets a very specific set of criteria," he says. "I will have very few bad ideas in my system if I design it properly."

Percentage of open innovation to market. When organizations transition to an open innovation model, an ideal metric is measuring the percentage of initiatives in the market that arose from open innovation. This is the measurement that P&G used as it shifted from an internal to an open model. Thoen says that between 2000 and 2001, fewer than 10 percent of the company's initiatives had an external or open innovation component associated with them. However, the CEO at that time declared a full-blown open innovation strategy, in which 50 percent of the company's initiatives that reach the market include an aspect of open innovation.

While the strategy had a five-year time frame, the goal was met in four years. "We're comfortable with 55 percent to 60 percent of our initiatives having a significant open innovation component," says Thoen. "That was the right metric to begin the strategy, because we wanted to change the behavior and culture from being internally focused to externally focused. But after a while, you want to begin examining the impact rather than just the number of open innovations."

Quality of open innovation initiatives. With its goal met for achieving a high percentage of open innovation initiatives, even more important targets were established at P&G. Recently, Bob McDonald, CEO for P&G, announced the next stage of open innovation for the company. First, P&G wants to be the preferred partner of choice — meaning the company is the first to see the best ideas from its external partners. Second, by 2015, P&G wants to generate US$3 billion of annual sales growth from its Connect+Develop open innovation strategy. To do this, the company is measuring not only the number of open innovations but also the impact of those initiatives. "It's more important to examine the quality of the relationships and the quality of the innovations (expressed in dollars) that come out of it," says Thoen. "We want to ensure we're focusing on the high-value opportunities and the high-value innovations with our external partners through open innovation."

There are opportunities with both closed and open innovation models. However, organizations should examine the external environment at the beginning of every initiative to leverage the potential innovation that lies outside the walls of the business unit. In an upcoming issue of Inside Supply Management®, we will delve into the topic of supplier innovation sharing.



For more information, send an e-mail to author@ism.ws.




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