Why Open Innovation is a more profitable way

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Blog
13 giugno 2017

There is a widespread belief that innovation is one of the principal driver to achieve a sustainable and profitable growth over time. Innovation is expensive, but do not innovate means extinction for organizations.

In the last years innovation is experimenting new ways, due to the current markets configuration characterized by constantly changing because of technologies development and globalization.

Specifically, two are the forces that in the global scenario are committing enterprises to adopt open innovation processes. The same forces that are changing, inevitably, profits and business models.

 

Increased costs to develop technology

In the last ten years costs to developed technology has notably increased, bot at macro-level, as innovation expenditures of countries, and R&D of enterprises. When, in an industry, the sales rate is lower or nearly than costs rate of innovation, with reference to the entire population of organization present in the industry considered, business model is not sustainable. Sales rate should follow innovation processes, remunerating all the factors hired, with a rate more than increasing. The proximity of sales rate to the innovation costs curve has been the warning bell for most industries.

 

Short product life cycle

Decreasing of profitability of an industry may derive from different variables, both endogenous and exogenous respect to organizational processes. Furthermore, in the last years, decisive was the drastic reduction in the life cycle of many products, which highlighted the non-homogeneity of timing between the maturation of an innovation and the need for rapid market launch of new products. This phenomenon does not have only negative implications. If the only driver to consider was a high level of cost to develop new solutions, big corporations will erect barriers for the smallest competitors. This scenario that would have led to the outflow from the market of companies without high financial resources. The combination of rising costs to sustain innovation and the shortening of life of new products has put all enterprises back on the line.

 

The new arena of the competition is the network, and the open innovation processes.

Open logic makes innovation returning to being economically attractive and sustainable, even in a world of short-lived cycles, because it acts jointly on the leverage of R&D investment and revenue.

 

A business model that combine closed and open innovation practices, is able to decrease the pression of innovation costs, by maximizing internal resources and optimize the recourse to external partners.

In fact, adopting open innovation does not mean leave the internal development of innovative solutions, but, focalize which internal resources allocate on the internal processes, and which ones acquire from the external environment, and the driver is multiple: use of external knowledge in combination with the internal one, to accelerate the innovation process. 

 

In fact, adopting open innovation does not mean leave the internal development of innovative solutions, rather focalize which internal resources and identify which resources organization need to acquire from the external environment. The driver is multiple: use of external knowledge in combination with the internal one, to accelerate the innovation process. 

A significant testimony is provided by Procter & Gamble, an article of Larry Huston and Nabil Sakkab documents how the company obtained considerable timesavings and time-to-market acceleration, launching on the market potato chip, made with a technology that is an adaptation of a decoration technique used by an Italian bakery. P&G has thus acquired the use license of technology, and has exploited an external innovation to market its own product.

 

An open innovation model impacts yet on the profits side, enlarge markets to acquire. Adopting an open innovation view means expand the business vision on others markets, starting from unused innovations. Patents portfolio of an enterprise is used effectively only for the 10%, patents unused, maybe because are not linked to the business model, are the remaining 90%. Those unused patents are, yet, costs and time spent to develop and test, the investment return could derive from transfer of these innovations to the external environment.

Looking open innovation as a new business model, is possible discover new revenues margin, originating by  spin-off, licensing or granting patents rights.