Monday, June 19, 2006

Virtuous Cycle of Open Innovation

Virtuous cycles are the elegant phenomenon in nature where systems function on their own because of self-reinforcing feedback loops. I think I see a virtuous cycle driving Open Innovation, illustrated in the diagram below.

The cycle seems to have begun with Technology Marketing (also called Intellectual Asset Management), back in the late 1990’s. Companies had accumulated many, many patents that were not making them any money. Companies such as P&G set up External Business Development groups to out-license those technologies. These groups paid for themselves in licensing revenues, but it didn’t contribute to the production of new products, the primary driver of sustainable growth.

Seeking truly innovative products to grow their businesses, companies such as P&G then began in-licensing technology from the outside, what many call Technology Scouting and which P&G calls its Connect + Develop program. Since so many companies had begun to do Technology Marketing, there was a nice big Technology Pool to select from to build new products with.

So many companies have begun to do Technology Scouting--close to one quarter of the top 1000 R&D spenders according to a Bain study--that they are beginning to have to compete for the hottest stuff. Paying the top dollar isn’t good enough for Technology Marketers pushing their latest and greatest. Buyers need to bring their own technologies to the negotiating table to differentiate themselves. That adds more technology to the pool, completing the virtuous cycle.

Of course no virtuous cycle builds on itself indefinitely. They all have a balancing force. But in this case, perhaps the most significant constraint to speak of is mankind’s own capacity to invent new technologies.

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