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If you want to develop an innovative product or service, it pays to look outside your company
Not all the smart people work for your company. That's a concept entrepreneurs understand intuitively. Eager to bring a dream to life, they'll readily partner with just about anyone to create an innovative product or service. But as companies grow, their leadership tends to forget how much help they got at the beginning. They start to believe that success is due solely to their brainpower and their staff's efforts. Who needs partners if you have staff in house to handle research and development, marketing, and customer research?
Frankly, you do. And if you haven't yet heard of open innovation, which is a new way of making and managing these partnerships, it's time you got acquainted. The underlying principle of open innovation—a term coined by University of California at Berkeley Haas School of Business professor Henry Chesbrough—is that we need to form alliances with others to accelerate innovation. Exactly who does what is far less important than the end result.
Before I give you an example, let's look at why this makes financial sense. A recent study of 738 manufacturers by the Georgia Tech Program in Science, Technology & Innovation Policy found that companies pursuing innovation as their primary strategy make nearly double the profit margin of those following a strategy of low cost (14.5% vs. 7.5%). They also realize nearly 50% higher profit margins than those who focus on quick delivery, high quality, or adapting to customers' needs.
Here's how open innovation can work. I know a commercial kitchen equipment maker with exceptional manufacturing and distribution capabilities. It wanted to sell wood-fired pizza ovens but didn't have a design for one. Instead of assembling a team to develop an oven, it more wisely used this new approach to find a partner that already had a design.
After searching U.S. patent filings, the company found an inventor with a unique technology for pizza ovens. Following a phone call and site visit, both parties are interested in going forward. While the company would have to pay the inventor a royalty on every oven sold, I estimate they'd save 80% on development costs and a year of R&D time.
I've done it myself. Two summers ago, I invented a card game called Morff. Making and marketing the game myself would have allowed me to keep all the profits, but that didn't align with my company's purpose of providing innovation research and development. So I licensed the game to Mark Hartwell, an entrepreneur who makes and sells playing cards, and who had already agreed to work with me on this project. I receive a royalty for each game sold, and I'm able to stay focused on what I do best. The partnership has been a good one, with hundreds of thousands of Morff games sold.
But you needn't take my word for it. One of this country's first great entrepreneurs, Ben Franklin, famously said: "We must all hang together or most assuredly we will all hang separately." He wasn't talking about business, but his point still stands. Whether you're fighting the British or a bad economy, it's advice to heed.
For a collection of Hall's columns, go to businessweek.com/go/sb/doughall
Return to the BW SmallBiz Feb/March 2009 Table of Contents