The Idea in Brief
Challenged by the anthrax crisis of 2001, Pitney Bowes swiftly developed imaging technologies for detecting suspicious mail. How? It used open-market innovation. By going outside its boundaries—to fields as diverse as food handling and military security—it gathered 82 ideas, then distilled the best solution.
Some of the fastest growing and most profitable businesses are using open-market innovation to improve the pace, cost, and quality of innovation. Through strategic alliances, joint ventures, and licensing, companies as diverse as IBM, Boeing, and Eli Lilly are opening their innovation borders to vendors, customers—even competitors.
Open-market innovation carries benefits and risks. The key to using it? Determine when it’s right for your company, then institutionalize it.
The Idea in Practice
Rewards and Risks
Open-market innovation offers four advantages:
- Importing new ideas multiplies innovation building blocks—ideas and expertise. Companies that collaborate with outsiders on R&D generate more of their total sales from new products than companies that don’t.
- Exporting ideas raises cash and improves employee retention. IBM earns nearly $2 billion a year in royalties from exported patents. This signals the need to act fast on new ideas—or watch them depart. Creative people stay, knowing their good ideas won’t get buried.
- Exporting ideas reveals an innovation’s true worth. Eli Lilly offers licenses for pharmaceutical compounds under development when their value is still unclear. If outside labs aren’t intrigued enough to bid, Lilly resets it sights.
- Exporting and importing ideas clarifies your core business. To increase return on R&D dollars, Boeing focused on innovations it could develop better than anyone else. Through outside collaboration efforts, it learned its competitive advantage lay in systems integration, not manufacturing. It now designs and integrates many systems going into its planes; e.g., flight controls and landing gear.
Open-market innovation also carries risks: Xerox virtually gave away a stream of innovations—from the computer mouse to the laser printer—then watched while rivals capitalized on them. When selling or renting innovations, structure deals to share adequately in the financial upside of your innovations.
Also, know when open-market innovation is right for your company. Look outside for new ideas when:
- Independent entrepreneurs can produce equally good (or better) innovations than your corporate R&D lab.
- Industry turbulence forces you to innovate without knowing which direction to take. Cisco Systems explored multiple product strategies with outside partners to navigate the volatile market for optical switching equipment.
- Disparate sources must coalesce to bring a promising idea to market. Cargill Dow—a $500 million joint venture between Cargill and Dow Chemical—discovered how to make plastic from renewable crops. Cargill provided the technical know-how; Dow, customer requirements.
Institutionalizing Open-Market Innovation
Open-market innovation works best within a coherent strategic goal and formalized decision-making system. Example:
Cargill established a three-tiered approach to making decisions about outside collaborations. Special teams at each of Cargill’s 13 business platforms handle huge deals. Individual business units manage smaller ventures. A corporate transaction desk is the nerve center and traffic cop, reviewing deals and overseeing decisions. Results? Speedy decision making, and many productive collaborations.
When Pitney Bowes learned a year ago that envelopes tainted with anthrax had spread infection and death through the U.S. postal system, executives at the company realized that both their customers and their core business were under attack. Overnight, the world’s largest provider of mailing systems was flooded with desperate requests from corporations and postal services seeking a solution—any solution—that could protect people from the deadly spores. Pitney Bowes’s core competence was in the area of secure metering systems that protected postal revenue; the $4.1 billion market leader had nothing in its pipeline to shield clients against a biological threat as unexpected as anthrax.