Free trade in ideas

If you're having trouble sparking innovation in your company, maybe it's because your focus is too narrow. In October's Harvard Business Review, Darrell Rigby, director of Bain & Co.'s survey on management tools and trends, and co-author Chris Zook suggest that looking outside your company for ideas can increase innovation while helping you better define your core business. Rigby spoke with Kathleen Melymuka from his Boston office.

Q: What is open-market innovation?A comprehensive system for increasing the flow of new ideas into and out of a business. It's like developing free-trade policies for a country.

Q: How does it differ from a joint venture?Joint ventures are just one of many tools for implementing open-market innovation. [Others include] strategic alliances, in-licensing, out-licensing, mergers and acquisitions, innovation exchanges, contract research. [There are] dozens of tools.

Q: What are in- and out-licensing?In-licensing is when you are licensing into your company an innovation from somebody else's business, and out-licensing is when you own the intellectual property but are giving [other companies] the right to use it. We're convinced that companies need to increase the flow of ideas into and out of their organizations.

Q: How will letting ideas flow out of my organization help my business?Four years ago, BellSouth took a look at a billing system it had developed and found that even though it had been expensive to develop, it was not a major source of competitive advantage. They calculated that competitors would create similar systems and decided it would be better to license the system to competitors to maximize return on investment and create industry standards that would favor BellSouth development programs going forward.

Q: How does open-market innovation help companies better understand their core competencies?When companies only compare their capabilities relative to their past, it's easy to convince themselves that they're world class. But when you compare yourself objectively to competitors, you learn the truth. If you're close to the best, those comparisons help make you even better. If you're not, they help you cut your losses. When I'm shooting baskets by myself in the driveway, I can almost hear the crowd going wild. But I had a chance to play against some former Boston Celtics recently, and that made it very clear that my competitive advantage is in business analysis and not in basketball.

Q: You also say exporting ideas helps companies keep their talent. That sounds counterintuitive. It does, but there are very creative people in companies who feel passionately about innovations and want them to go to market. If the company they work for won't do it, they will find someone who will. The advantages of open-market innovation are two-fold: If an innovation is marketable, but perhaps [can be handled] more effectively by another company, then they still get to see the product get to market and they establish a track record that gives them credibility in the company. If [the innovation] fails to attract attention, than it's harder to blame your ignorant, shortsighted boss, because the market has spoken. You learn why it didn't work and what it would take to make future innovations more successful.

Q: Why is technology a fertile area for open-market innovation?There are five factors that make an industry more amenable to open-market innovation. One is the intensity of innovation: How frequently are innovations taking place? Technology is very high on that scale.

Second is economies of innovation: How much money does it take to come up with an important innovation?

In technology, garage shops often come out with the most innovative breakthroughs.

Third is the need for cumulative innovation that builds on other innovations so you get something better than the individual pieces. Technology is filled with opportunities for cumulative innovation.

Fourth is the applicability of innovations across companies and industries. Technology innovations have such a wide variety of applications: Something that shows up in the space program ends up being useful in a consumer's home theater.

Last is market volatility: How often do unpredictable disruptions take place in the industry that are hard to forecast?

You often have five competing technologies, and no one knows which will win. That also makes open-market innovation valuable in technology.

Q: Can the open-market innovation approach backfire?It certainly can backfire. Companies like Xerox that virtually gave away a stream of innovation, from the computer mouse to the laser printer, demonstrate that if companies are unsophisticated about the market value of innovations, they can give them away too cheaply. Also, if they suddenly begin meeting with lots of new companies to talk about ideas without proper legal guidance and then decide to implement them, they can find themselves, as Disney did, being sued by people who claim they stole the ideas.

Q: How do I manage the risks of sharing innovation?Part of it is working with the senior management and legal counsel to develop policies around what you will and will not share and how you're going to do that and who is going to do that. What you don't want is renegades either buying or selling technology without understanding the strategic role of technology in the corporation's portfolio. Leadership has to take an active role, particularly in the beginning, about setting policies and procedures. Then as the organization gets better at understanding and implementing those policies, they can loosen the reins and give more experienced managers opportunities to act more independently.

Who manages open-market innovation in the company?

If it's going to work, everyone does. It is likely to start at the top because the chief executive has to give permission for the organization to take these risks. But to work, it needs the eyes and ears and hearts of everyone because it has to become a way of life. The organization has to be proactively looking for other companies that could benefit from an innovation. They have to explore all direct and indirect competitors' innovations and see where something could help their company.

Getting Started

  1. Understand what the company's business objectives are, what role innovation plays in those and what activities will be central to the company's future and must be strengthened.

  2. Analyze the company's innovation projects, and categorize which of those support the main business objectives and what the company's track record is in those types of projects.

  3. Map the hot spots for relevant innovation around your business, and ask how many innovations are likely to come from companies other than your own. Bain & Co.'s survey found examples where 95 percent of innovations are coming from other companies. If that's true, you need to ask how you can open that up.

  4. Survey people both within and outside of your company about what they think are the barriers to innovation, and talk to vendors and customers about how it looks from outside: Where are the bottlenecks?

  5. Identify the most important innovations in your industry, understand the origins of those ideas and ask what you could do to get better access to those innovations. Then get going on it.

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