In a world where innovation is the name of the game, many companies are investing in research and development. However, the process of innovation itself is changing and being reshaped. Internal innovation is out; and open innovation, especially the kind that engages communities and a variety of stakeholders, is in

This chapter was written by Omri Cohen, Director of Strategy and Business Development at Smartlend Fintech Solutions, and Yoni Blau, Head of Innovation & New Ventures at Flex Israel.

In 2016, it is no longer necessary to convince a director that innovation is the key to success in our ever-changing reality. Companies that have not adopted new paradigms, if they still exist, are now less relevant. One need only compare the companies that made the Fortune 500 list in 1955, and those that make up that list today, to see that only 61 of them (12% only) are still there and survived the vicissitudes of time.

The digital world that has infiltrated every aspect of our lives in recent decades has undermined companies using outdated models. For example, Kodak failed to adopt digital camera technology and lost its relevance in a long period of twenty years. Today, the pace of change is faster, and larger companies can lose their leading market position in five years or less, if they fail to innovate. Examples can be found in the hospitality and transportation industries, which are experiencing profound disruption of their business models in local markets. For example, the largest hotel company in the world today, that is, with the largest amount of rooms available, is Airbnb, which was established only eight years ago and does not own any of the rooms it offers. Similarly, the world's largest taxi company, Uber, was established seven years ago and does not own a single taxi.

 

From closed innovation to open innovation

In the previous century it was thought that the main source of innovation was within a company, and that knowledge should be developed and maintained within the organization. Over the years, companies have adopted different internal innovation management methods, such as the ‘three horizons’ model sometimes referred to as 70/20/10 model, in a way that fosters development and innovation within the organization. That model assumes that the company is professionally managed and knows how to develop new areas of operations, products and services. The recognition of the importance of innovation led to allocation of resources and innovation-strategy planning, which assists the organization in maintaining its market position and propels it forward.

In 2003, William Henry Chesbrough published his book “Open Innovation” in which he described a recent corporate innovation model. This model states that in its innovation processes the company cannot rely solely on internal development, but should cooperate with external entities, including academic institutions, startups, business partners, customers, suppliers and so on. The model describes the corporate funnel of ideas and developments, and specifies the ways to adopt external knowledge on the one hand, and provide knowledge developed within the organization, to others. For example, a company may hold joint research with universities, trade patent rights, invest in startups or acquire technology companies.

The model developed by Chesbrough, is the foundation of the innovation management customary in most companies today. The insight arising from this model, that of a need to combine both internal and external innovation sources, was the motive for the arrival of huge international companies to Israel, which became renowned as the “Startup Nation” thanks to the wealth of technological innovations it generates. The expression of this phenomenon can be seen across the industry, starting with collaborations with universities and purchase of patents, the funding of technology incubators and accelerators, establishment of investment funds, direct investment in young companies, and ending in the acquisition of entire companies and establishment of development centers in Israel. Today, we can say with pride that there is not a single Fortune 500 company that has not taken an active step in order to connect with the Israeli entrepreneurship industry.

 

Open innovation – the next generation

The traditional approach to open innovation still puts a premium on the organization and its research, development and commercialization channels. However, today, we are witnessing the emergence of another, not less interesting trend that is expected to bring a meteoric rise to a different kind of companies, those that are not satisfied with adoption of outside innovation, but are leveraging entire communities, government agencies and other companies to create decentralized innovation, while gathering around a common vision.

There are several companies that have managed to harness entire communities to create shared content. A good example is MakerBot, the manufacturer of home 3D printers, which was founded by the community of designers sharing the models they designed. Because what is a home printer good for, if the end user does not have appropriate content for printing? Other examples are the developer communities of Apple and Google, where promoting the success of apps is in the common interest of developers, the company and the user community. How does it work in practice? All software version updates are first released to the developer community that has access to certain operating systems, and which then develops the apps as they see fit, within basic guidelines.

However, with each round, the companies “reveal” to some extent, their research direction, thus jeopardizing their competitive edge within the market. Therefore, the degree of cooperation with the developer community determines the level of integration of open innovation in the organization’s DNA. It is customary to look at Apple and Google as standing at the opposite ends of this integration. In technology blogs, Apple's strategy is described as a “closed garden” – Apple's technology is designed to “communicate” only with Apple's technology – while Google's “garden” is open to everyone. An example of the differences in the level of exposure and harnessing of a large audience in favor of their developments between these two corporations can be found in their activities on the development of autonomous cars. While Google is releasing the idea, exposing semi-finished models and declaring its intentions, the intentions of Apple are shrouded in a dense fog of secrecy, and only indirect hints imply that Apple would not pass on the autonomous car. Over the years, we will be able to examine the impact of the use of open innovation as a growth engine of the organization’s success and its level of openness.

 

Open innovation 2.0 – the main challenge

Despite the paradigm breaking and the use of a developer community to maintain a decentralized innovation ecosystem, the above-mentioned companies place great emphasis on their brand name, and not innovation or shared vision as an end unto itself. This is probably the reason that led researchers to start adopting a new model – Open Innovation 2.0, if you will. The Quadruple Helix Model puts a premium on the challenge or the innovation subject, and brings together the efforts of government agencies, universities and research institutions, other companies and individuals. Such innovation networks engage in what is known as “inter-organizational innovation,” which functions to promote common interest and progress, so that all stakeholders will benefit.

Pioneering the innovation networks approach are the founders of the Local Motors Company in Phoenix, Arizona, who made a daring step by adopting the Quadruple Helix Model in order to fundamentally change the automotive world. Local Motors was founded by engineers and car enthusiasts, motivated by a deep passion for innovation and customization in the automotive world. The founders of the company have set a goal of becoming the alternative to traditional automotive manufacturing that dominate the knowledge and tools for the production of future generations of vehicles, and tackle the tough challenges of the automotive world.

Local Motors actually managed to break the monopoly over knowledge and decision-making process that used to belong to the strategy and development departments in huge vehicle manufacturing corporations. In 2007, the company launched an online platform that enabled co-creation and entrusted the process of creating knowledge and making decisions in the hands of those with the single minded devotion to the subject – the men in the field that live and breathe cars; those who see far and share a common vision for a paradigm shift in this industry. The designers and engineers in this community are collaborating in order to design and produce custom car parts using the open source design method, and, at the end of the day, they are also the end-customers of the company's products.

 

Open community – does it work, and how?

The beauty of the Local Motors’ method lies in its simplicity and innovation. The company defines and characterizes a project and then passes the project's requirements to the engineering community via their platform. The community members upload designs of the various vehicle parts, and all partners hold a democratic vote on those parts. Meanwhile, the designs undergo rigorous testing of product characteristics, and the best ones go up another level. When a design is selected, the engineers who created it are awarded a prize of 10-50 thousand dollars. In this context, it should be noted that none of the community members receive any pay from the company. The only payroll employees are the employees of the company whose responsibility is to facilitate the two-way flow of knowledge, and to foster its common innovation focal point – the designers’ community.

All that remains now is to examine the company's business model with the magnifying glass of the outcome: In 2014, Local Motors and its designer community introduced Strati – the world's first electric car designed using the open source design method, and manufactured entirely by 3D printers. This is a great achievement – a complete vehicle “manufactured” entirely on three-dimensional printers, without the huge R&D budgets, and without having to pay one engineer's salary. The printing required 44 hours and was carried out in front of an audience. In September 2014, Strati went out for its first test drive, which was hailed as a great success. The printed vehicles of Local Motors will be available for pre-order in mid-2016, and the production of vehicles, according to the company, will commence at the beginning of 2017.

The success of the Local Motors’ business model led the company to the conclusion that open innovation processes, which enable the two-way flow of knowledge between the organization and its community, accelerate the pace of product development and improve the quality of the results. Furthermore, this business model is sustainable: The open innovation platform offers significant cost savings throughout the entire development process, from product design, through manufacturing prototypes, to market research and feasibility studies. After demonstrating that the model works, Local Motors undertook to implement it in other industries as well.

In 2014, Local Motors, in collaboration with GE, established one of the world's first development centers using open innovation platform called FirstBuild, which is a community of designers and engineers dedicated to creating the next generation of smart home appliances. In the first year of operation Firstbuild reached 7,500 community members, who worked together on 800 different ideas for revolutionary kitchen products. The development center has perfectly implemented the Quadruple Helix Model – the center uses an open developer community, and maintains close ties with the students in the engineering department of the University of Louisville and its research institutions. In addition, the Kentucky Gov. Office and the Municipality of Louisville are also involved in the project.

Open innovation philosophy of Elon Musk

One of the pioneers of this approach is Elon Musk – a serial entrepreneur, whose objective is to solve the problems of private and public transport that humanity is facing in the 21st century. “All Our Patent Are Belong To You” is a sentence that opens the blog of Tesla, a company owned by Musk. Moreover, Tesla announced that the company will not pursue legal action against users that apply its technology in good faith. Senior executives in the technology realm have been scratching their heads over Tesla’s open source strategy. However, Tesla realized that paving the way for the electric car revolution cannot be done by laying intellectual property mines at the foot of developers and the car enthusiast community. Patent registration is intended solely to make it difficult for major companies to use Tesla’s technology for creating a competitive advantage, and to “beat” it in the business arena.

In 2013, Musk added fuel to the fire of open innovation, when he introduced Hyperloop – an innovative and ambitious transportation concept, whereby capsules are propelled by linear induction motors and air compressors in tubes, for the transportation of passengers and goods at a speed of 1,220 kilometers per hour. When the idea crystallized in his mind, Musk faced two options: either to develop his innovative technology in the dark basement of intellectual property or to do so on the sunny lawns of open innovation. Like he did with Tesla, Musk chose the second option for Hyperloop. To meet the challenge, SpaceX, owned by Musk, harnessed its open innovation engines and launched a prize-awarding competition. The competition calls on students and independent teams of engineers to design the train compartment.  The most successful designs will be used by the company to examine the feasibility of an early prototype that will have to successfully complete a distance of 1.6 km. 700 teams of independent engineers registered for the competition, of which 120 were selected to compete for the right to shape the future of public transport in the world.

 

And what about Israel?

Most Israeli companies still employ the internal innovation approach, but some have already broken the walls of the organization and set out to find and link up with external innovation sources. Financing and managing technology incubators, initiated under the auspices of the Office of the Chief Scientist by Blue Chip companies such as Strauss, Elbit and Teva, are significant steps not only in joining young technologies, but also in their ongoing support, starting from early research and development stages. Other companies have chosen to be exposed to technology by joining accelerators, and some even initiated internal programs which grant them access to startup companies.

These examples represent the traditional concept of the open innovation model. The Strauss Company made an interesting move around the “My Strauss” campaign, when it opened the discussion on new products to the user community, thus enabling its customers to determine the company’s new products. However, the process began and ended with providing ideas and a forum for public discussion. This process could have been taken one step further, if it had opened the doors to the community of chemists, food engineers and biologists, along with harnessing the resources of the Ministry of Health and universities. Together, they could have found a solution to many common challenges, such as development of sodium substitutes. Then a quadruple helix model innovation network would exist, the kind that shifts market paradigms.

Open innovation at the Israel Innovation Authority

The Technological and Biothechnological Incubators Program of the Israel Innovation Authority (former Office of Chief Scientist) serves as an open innovation platform for Israeli and foreign corporations. The program was restructured three years ago, and now the main emphasis is placed on the added value a corporation brings to the incubator companies. Local franchisees were selected as part of a competitive process, and they include Teva, Elbit and Strauss, as well as multinational corporations, such as Johnson & Johnson, Nielsen, Takeda, Hutchison, Philips, IBM and Medtronic.

These days, the Israel Innovation Authority is working on a new program aimed at encouraging open innovation in Israeli industry, called Innovation Labs. The program's goal is to provide startup companies with access to technological infrastructures, as well as market understanding, marketing channels and specific expertise required for their success, which are not available to entrepreneurs in Israel today. The assistance will be provided through the Labs established by leading industrial corporations. The Innovation Labs franchisees will be selected via competitive procedures, which will be published on the website and in the press.

 

Here to stay

A review of market trends shows that in the coming years, the trends of open innovation, co-creativity, crowd funding, and open source will accompany and serve humanity in resolving its greatest and most complex challenges.

The key question is whether humanity will succeed in harnessing the power of sharing in solving social, environmental, and others challenges, which do not bear clear economic value. How can we move from a world where knowledge is concentrated under the control of giant corporations, to a world where shared knowledge flows between community members with single minded devotion to the subject? The answers to these questions will determine the pace and nature of technological development, and the way in which humanity will face challenges in the coming years.