How open innovation can help firms deal with crisis
Vanhaverbeke, Wim Roijakkers, Nadine
Vanhaverbeke, Wim
Roijakkers, Nadine
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Publication Type
Journal article
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Supervisor
Publication Year
2009
Journal
Adaptive Options
Book
Publication Volume
4
Publication Issue
2
Publication Begin page
4
Publication End page
6
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Abstract
The benefts of open innovation in economic downturns: Saving on R&D investments and the development new strategic options Wim Vanhaverbeke In the last decade, firms have opened up their innovation processes. According to theopen innovation approach, firms actively collaborate with external partners throughout the innovation process. In the open innovation model external ideas and external paths to market are placed on the same level of importance as that reservedfor internal ideas and paths to market. The literature on open innovation has mainly paid attention to the benefits of opening up innovation activities on the long term innovative and financial performance of companies. In this chapter, we examine how managers can benefit from open innovation in economic downturns using a set of strategic or tactical moves.Open innovation is not only an interesting option in economical stale periods but also in economic downturns as we experienced during the last years. An economic crisis poses new challenges and opportunities for innovation strategies in established companies. Managers in large companies freeze or reduce R&D budgets to save costs and improve the overall financial performance of the company. Once the economy recovers managers tend to invest again in R&D in the hope to get revenue growth from new products in the next few years. This go / no-go policy results in the so-called innovation cycles, which, on average, have a detrimental impact on the long term growth and profitability of large companies. History shows that the companies that continue to invest in their innovative capabilities during tough economic times are those that fare best when growth returns. Therefore, it is important to find strategies to alleviate the effects of the innovation cycle. Applying specific open innovation strategies and tactics in economic downturns is one way to reach that objective.Moreover, in a challenging business climate most companies have to prioritize their R&D investment as the budgets get squeezed. Mangers are face with a real dilemma: they have to manage costs tightly while keeping growth options alive for thefuture. Managers are forced because of the budget squeeze to choose for projects that are most likely to generate near-term profits and initiatives which fit best with the company’s core business. It’s a smart short-term strategy. These projects are usuallyless risky, more incremental in nature and they will deliver some relief for the company in terms of revenue growth and profits. However, they are not the type of projects that will generate new businesses securing the long term growth and the overall competitive strength of the company. Rigorous prioritization halts many potentially promising projects at an early point in their development and leaves them stranded inside the company. If a company is systematically abandoning these more risky and long term oriented projects, it risks not being able to grow beyond its core business, which inevitably will mature over time. In the end, the prioritization of the short term projects becomes the enemy of growth and the company lacks a foundation from which to rebound when the economy recovers.In this chapter, we examine how open innovation can play an important part in alleviating the problems of budget cuts and prioritization which are typically problems that cannot be solved if a company is locked in “closed innovation” thinking. In lean economic times, several open innovation practices can be used to cope with the afore mentioned challenges in innovation management. There are different ways to lessen the financial burden of R&D investments by cooperating with external partners. Through open innovation a company can place some of its assets or projects outside its own walls. That not only saves time and , but it also can cultivate new supplier and partner relationships, promote innovative ecosystems, and generate high-margin licensing income. However, cash rich companies have still other options. They can use open innovationin economic hard times to become stronger when the economy is recovering. Economic downturns are characterized by depressed VC-markets and low prices to acquire technology start-ups. This opens opportunities for large companies to make deals with those small companies or to acquire them, integrating top technology which would not be available or affordable in periods when the economy is booming. In sum, hard times offer golden opportunities for companies that have cash as they can build relations with technology suppliers at favorable conditions securing in this way their long term growth. In short, in lean times open innovation can be helpful in reducing costs of R&D and, more importantly, it can create opportunities for growth which are in some cases more attractive than in years of strong economic growth. The benefits of open innovation during an economic downturn have recently been analyzed by Chesbrough and Garman who have published a Harvard Business Review article (June 2009). They present five different moves as to how firms can benefit from openinnovation in an economic recession. These five moves emphasize the benefits of inside-out open innovation, which refers to processes whereby a company places some of its innovation projects or assets outside its corporate boundaries. In this waycompanies can generate extra licensing income, nurture partner relationship, developand expand ecosystems, create spin-offs, and share costs and risks of major innovation projects with external partners. We summarize these five moves and introduce six additional benefits of applying open innovation during tough economic times. Those moves allow a company to focus its R&D investments on its core business today while preserving growth options for tomorrow. Let’s examine these moves.
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Innovation Management