In an article by Clayton Christensen and his books, Christensen explains that vertical integration ( in companies or products) is required when the interfaces between modules or stages are not well defined. Hence the ability of open innovation to flourish is a consequence of the definition of interfaces and modularity in the product development cycle. Historically, this modularity has evolved from the process of outsourcing manufacturing and non core R&D activity, as well as the economics of Mergers & Acquisitions. Open innovation is really about creating an idea market. A place where people and companies can buy and sell ideas. Companies use their established processes and gatekeepers to assess and integrate such ideas into their product pipeline. The main advantage of this approach is to increase the efficiency and speed by which ideas become products or business concepts.
To understand the potential of open innovation we can extrapolate from P&G, an early innovator in this field, which targeted to derive more than 50% of its revenues from external innovation. If we extrapolate this across industries and companies and assume all this innovation will be compensated with some ongoing royalties, we find the potential market is tens if not hundreds of Billions of Dollars.
Open innovation is still in its infancy. We find its definition and practice vary between companies. Some have internal programs, while others make use of the various web sites devoted to the topic. Charting the waters of open innovation is challenging, but absolutely required for prevailing in today’s and tomorrow’s hyper competitive market.