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Portfolio Management and Open Innovation

After promising to tie this issue of portfolio management to open innovation, it may appear that this promise was sidetracked. Not so. One important component of open innovation is that it creates an opportunity to share risks and expenses with external parties. The adverse consequences of the false positive are effectively neutralized when someone else is underwriting some or all of the costs. Details of how you can manage this risk-sharing, and the organizational structures that support it, will be covered in subsequent chapters. But, for now, error minimization, portfolio management, and open innovation need to be integrated into a total innovation management system that copes effectively with risk and probability, and that manages to a desirable economic outcome.

Many companies—and even whole industry sectors—compete primarily on the basis of innovation, for example, pharmaceutical companies that must routinely invent new medicines or the advertising industry that constantly must come up with snappy original taglines. Innovation is what enables these companies to maintain a competitive "edge" as opposed to competing on price, convenience, added services, or some other aspect of business. Even as the argument is made for other modes of competing, one cannot help but be reminded that convenience, services, and low-pricing is often the opportunity presented by an innovation of some type. No, the reality in the twenty-first century is that virtually all businesses are months away from a wave of novel competitors. Innovative companies survive.

Historically, innovation competition has revolved around each company's capability to assemble creative departments—and most important, teams of exceptional talent that strive to out-innovate their competition. This was accomplished by smart people, with excellent equipment and facilities, inventing new products—and even new technologies—and often making fundamental advances in science. Think Bell Labs as a prototype. Of course, even though Bell Labs continues as a distinct entity, it has not fully survived in the form that characterized it in its heyday because it has been altered by spinoffs, layoffs, mergers, and mission changes.

No doubt many factors contributed to the transformation of the central lab, with a broad remit for science. It is not the intent to thoroughly analyze Bell Labs or even to propose a scholarly hypothesis to explain its mutation. Surely some of those factors must include the broader access to knowledge because of the "information age." Business, also, has become more sophisticated in its capability to locate and license ideas. This decreased the need to invent it all in-house. The adage that "none of us is as smart as all of us" has been scaled up and globalized.

Even so, an enormous percentage of the applied science and technology, and ultimately, "reduction to practice" remained an internal skill. Responding to this reality, a significant number of graduating scientists, engineers, and technologists historically went to work for large corporations—as did designers, graphic artists and draftsmen. The shift to "distributed innovation" has taken place slowly—over decades—until today, when many sectors can point to significant fractions of their new product introductions and underlying technologies as originating outside of their corporate labs. Distributed innovation is a gathering of ideas and solutions from many quarters and the integration of the pieces, by a central organization into what would be considered the final innovation. Some, such as Procter & Gamble, have even declared this as a strategic intent, one they call "Connect and Develop," or C+D. They have set quantitative goals to increase licensing as the primary mode of innovation growth while maintaining a more constant level of internal R&D resources. This initiative is one you learn more about in the case study at the conclusion of Chapter 6, "The Challenge Driven Enterprise."

Now is the era of "Open Innovation." The shift to contract labs and licensed technologies is currently the major part of the open innovation movement. But recent increases in broadband Internet access and other leaps in communication enable you to imagine a future in which technical problem solving, on the spot invention, and on-demand innovation can be realized—maybe even predominantly—through open communities of scientists. Examples of these open innovation communities are InnoCentive, the authors' company, and TopCoder. These enabling platforms, and their attendant business entities, in which the network is managed on behalf of other institutions, have been named innomediators by Professor Mohanbir Sawhney at Northwestern University's Kellogg School of Management.

Later chapters discuss how the various innovation channels are selected, how they play off against one another, and how they are ultimately integrated for innovation. Putting all this together ushers in new organizational and partnering realities: Marketplaces in which intellectual property—with or without its legal appendages—is exchanged as readily as Hummels on eBay. Maybe that's a bit of an exaggeration in 2011, but stay tuned.

Just as the random soot patterns created the ability for the Naskapi to explore unknown regions, so too, do the various modes of open innovation enable organizations to explore unknown and unbiased, or at least differently biased, regions of technology, design, or policy, in ways previously too costly or too difficult.

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