A guide to open innovation (with case studies)

Daniel Saunders

Chief Executive Officer

The following guide delves into what open innovation means and the different models available to your corporation. We’ll analyse why you would choose to pursue an open innovation solution over a closed innovation approach and examine case studies from P&G, Metro Bank, United Utilities, and Nivea.

What is open innovation? 

Open innovation is primarily about partnerships and collaboration. It’s about identifying and connecting with innovative ideas, solutions, people, or companies to drive value, solve problems or explore new opportunities. 

The term open innovation (OI) was coined by Henry Chesbrough, a professor at UC Berkeley. He described it as trading ideas in and out of an organisation to accelerate innovation and open up the organisation to using more external ideas. 

The definition suggests two important aspects that characterise open innovation; 

• The “outside-in” aspect brings external ideas into a company’s innovation process.  
• The “inside out” aspect is where ideas from within the company are shared externally. 

Types of open innovation  

Open innovation means companies seek collaborators to innovate and co-create alongside. Types of open innovation include open innovation labs, accelerators, incubators, M&As, and hackathons. Often the most fruitful open innovations involve unconventional partnerships.

Advantages of open innovation 

When you want to develop a new idea via open innovation, you have two main options; buy or partner.  

• Buy an existing innovation. Buying a company that owns an innovation is much faster than trying to build something yourself, sometimes by decades. The other advantage of buying is you usually own the innovation and any IP outright and can customise it as necessary. Corporate Venture Capital can be an alternative to a full takeover, allowing companies to test the waters with smaller investments into potential acquisition targets, whilst also bringing in additional revenue from the investment. 
• Partner to implement an innovation. Partnering is the quickest and cheapest option, but the compromise is that you don’t fully own the idea. That’s why finding the right company to partner with and validating their ideas for your use cases is essential. This is where corporate innovation labs and accelerator programs add immense value—scouting for global ideas, assessing the fit between businesses and use cases, leading agile development and validation phases, etc. 

Case study: P&G shifts from a $2bn annual spend on internal R&D to open innovation

Proctor and Gamble (P&G) are one of the world’s largest FMCGs businesses. Their market position as a global leader can be connected to their long history of innovation, starting with the launch of their R&D department in 1890 to launching Connect + Develop, their open innovation program in 2002. 

But after generations of internal closed innovation, what prompted the shift to open innovation?

Former P&G CEO A.G. Lafley spearheaded the change in 2000 after realising that the business couldn’t meet its growth objectives by throwing more money at R&D (at the time, they were spending more than $2bn annually on R&D). 

But Lafley had noted that over the decades, many of P&Gs most successful innovations came from “unlikely connections, approaches and ideas.” Such as technology invented for one industry enabling innovation in entirely different industries. Or how company acquisitions allowed P&G to form strategic external connections that lead to “commercially successful products.”

Based on these insights, Lafley set an internal company goal that 50% of all future product innovations should be developed with one or more external partners. At the time (2000), only 10% of product innovations involved outside partners. 

P&G managed to exceed the target before the end of the decade. The result of increasing open innovation to 50% had a massive impact on the corporation, which Lafley himself summarises;

“…company sales more than doubled, profit tripled, free cash flow quadrupled, and P&G’s stock price nearly doubled in a decade when the S&P 500 index was actually down.” A.G. Lafley

What’s needed for open innovation to succeed? 

Corporations’ biggest mistake is seeing a cool idea and shoehorning it into their business. Inevitably this approach fails. 

While there’s no set open innovation model, one thing is always essential, and that’s structure. Innovation means change; incorporating a new idea or process into an existing system requires the system to change to meet it (or the idea to change to meet the system), e.g. changing your current processes, people or mindset. That’s why any new idea must be tested and validated to ensure it’s the right fit before incorporating it into business as usual. 

Three open innovation case studies 

1. United Utilities found innovation success through a structured open innovation approach 

Since 2017, L Marks has run the Innovation Lab for the UK’s largest listed water company, United Utilities, which manages the water network for more than seven million people.

The innovation lab comprises a 12-week program that moves through several stages to advance the innovation. For example, all the teams participating in the innovation lab run live trials in real business environments to validate their ideas and over 90 United Utilities employees are called upon to mentor the teams based on their subject matter expertise. 

Applying their tried and tested program meant the L Marks scouting team got in front of 1500 businesses, received over 400 applications, and accepted over 30 teams into the program from France, Portugal, Canada, Australia, India, and the UK. 

This structured approach to open innovation meant that United Utilities made framework agreements with over half of the program participants.

Kieran Brocklebank, Head of Innovation at United Utilities, explains why their Innovation Lab brings about such novel innovations; “Interestingly, all the suppliers we are working with would label themselves as small or startup, and five of them had never worked with a UK water company before. They all have a completely different energy to a large corporate like United Utilities, which is exactly what you need to disrupt the status quo.”

2. Nivea co-created a best-selling deodorant with customers 

Nivea used “netnography”—mining online customer reviews and comments—to gain insights about how customers used their products. They realised that customers had two major gripes when using their deodorant,

• Yellow stains on white clothes 
• And white deodorant stains on black clothing. 

Before diving into product development, Nivea contacted customers online and asked for their feedback about which new product characteristics would be most important to them. This co-creation work led to customers providing additional ideas, which were also incorporated into the product development. 

The Nivea R&D team then partnered with specialist chemicals company Evonik, and experts at the textile research centre Hohenstein institute, to develop a new patented technology that protected dark fabric and minimised staining on white clothes. Nivea’s “Invisible Black and White” deodorant became the company’s best-selling deodorant in its 130-year history.

3. Inside-out and outside-in knowledge sharing by Metro Bank 

Metro Bank runs the Magic Makers program, which includes Fusion, a 3-day competitive corporate innovation workshop. Fusion is open to external start-ups and internal Metro teams. Both have to compete to earn a place at Metro’s 10-week innovation lab to develop their ideas further. 

This program exemplifies open innovation. The Metro Bank team are heavily involved in the programme to share their knowledge with external startups. And by involving internal and external teams, knowledge, views, working practices, and ideas are passed inside-out and outside-in.

In the 2022 Fusion program, three winners were chosen, one of which was an internal Metro Bank team, ‘Return of the Hack’, whose idea will enable customers to access more information digitally.  The team will work alongside other external startups to develop their idea in an agile manner during the 10-week innovation lab. 

Faisal Hussain, Chief Technology Officer at Metro Bank, explained the impact; 

“Innovation Lab brings out the very best in our colleagues as they compete internally to come up with MAGIC – literally Making A Great Idea Count. They also evaluate how we can embrace and embed the start-up propositions into the practical day to day running of the Bank to realise real results that benefit our customers. The spirit of innovation is so strong in Metro Bank that an entirely internal team of colleagues has been selected over an external start-up.”

Summary

No company can survive in today’s world without some form of open innovation.

The collaborative approach characteristic of open innovation models gives companies access to innovative ideas and solutions across the globe. It provides a clear advantage over innovating internally and in isolation, especially considering the breadth and speed of today’s technological advancements. 

But rather than a silver bullet, open innovation requires structure to access it in any material way. Structure in terms of international scouting to leading agile development and market validation phases to ensure the program is a commercial success. 

26/10/2022