This post about open process innovation first appeared in the World Economic Forum’s Agenda platform on January 11 2018, titled “The future of competitiveness is open“.
Digitization is making its sweep through manufacturing. With the advent of a new industrial revolution, people, things, and companies across the globe are connecting in cyber-physical production systems. Promising technology and business ideas are entering the market with a speed that no individual can match. With it, possibilities for new product and process innovations abound. In such a fast-paced environment, a firm’s competitiveness depends on its ability to learn ever faster and effectively turn that learning into action. The problem? Very few firms are rigged for speedy learning, which is necessary for the future of manufacturing.
Introducing open process innovation
One promising way to mitigate this problem is to open up. The premise is that the rate at which change happens in closed systems is much slower than in open systems. Thanks to the work of Henry Chesbrough, open innovation has become a big thing in business strategy. Openness allows ideas to flow easily across firm borders. While the open innovation strategy has been successful in many product innovations (what firms produce), it has to a much lesser extent been applied in process innovations (how firms produce). Most companies keep their process innovations under tight wraps, often for irrational reasons.
Similar to the manner in which we tend to believe that our driving skills are above average, managers tend to believe that their companies’ process capabilities are better than average. This cognitive bias, known as the above-average effect, can be a dangerous illusion, especially for below-average performers. Ironically, another cognitive bias—the Dunner-Kruger effect—makes managers of underperforming companies especially prone to overestimating their process performance. They quickly become complacent with process innovation initiatives. To thrive in the future of manufacturing, companies should instead challenge their perceptions through open process innovation.
Open up for supply chain partners
Many companies engage in expensive and ineffective search for process innovations, often involving armies of external consultants and benchmark tours to far-away companies in unfamiliar industries. However, the best process innovations are not necessarily the least accessible. They can also be found right outside the factory gate. Opening up to suppliers and customers usually provides the most promising path toward finding new and valuable process innovations.
For example, a strategy that may be difficult to establish, but that can pay off richly in terms of process innovations, is to bring key suppliers together in an open exchange of problems and ideas. In such supplier associations, supply chain partners can establish a safe arena to discuss and implement efficient routines for production, communication, and logistics across company borders. The chance is that there might be a considerable overlap of issues, most of them unknown for all but one party, and the most painful ones are best solved using a systems perspective involving several partners.
Tech-enabled open process innovation
The industrial revolution, which urges faster process innovation, also offers unpresented opportunities to search for, harvest, and scale process innovations. Manufacturers should start by opening up internally. The continued implementation of integrated business software for planning and control helps to quickly standardize and scale process improvements. The industrial internet of things, which brings identification tags and sensors, enable access, analysis, and learning from hitherto unexploited data. Communication software and new technologies, such as smartphones and augmented reality, can connect employees and experts in sprawling global production networks with the speed of light. Arguably, the big jackpot of these new opportunities can first be realized when the manufacturer opens up to strategically selected outsiders.
For example, companies that share proprietary machine data with machine suppliers allow these suppliers to learn first-hand how their products serve customers. The machine supplier uses this insight to improve machine hardware and software and then to improve the process for its customer. Sharing such data can be a cost-effective way to outsource and unlock process innovations for the particular machines. Such openness can also provide a contemporary competitive advantage against competitors following a closed strategy.
Open up to your competitors
It may seem like a stretched argument, but there are instances in which open cooperation with competitors is a better strategy than walled-off rivalry. For example, companies engage in many kinds of expert networks, professional associations, and technology clusters. A key motivation is to keep track of competitors’ innovative solutions and ideas. These arenas, however, are much less effective than they could have been under greater levels of openness. When everyone keeps process innovations under tight wraps, participants become complacent, which leaves plenty of playroom for new entrants and substitutes.
Take the example of a technology cluster that specializes in high-end electronic products in Scandinavia. Although competing for many orders in the local market, their cluster members realized that their toughest competitors were not their neighbors, but foreign players. In this perspective, companies in clusters do not compete against each other, but against other clusters. Clusters that are, on average, able to innovate their processes faster than competing clusters can gain a competitive edge, to the benefit of the members of the cluster. The cluster in Scandinavia decided to cooperate openly in process innovation, opening their factories to local competitors, organizing joint seminars, and sharing process problems and innovations in dedicated workshops. Despite operating in a fiercely competitive global market and being located in one of the world’s most expensive regions, these companies are thriving today.
Overcoming the hurdles
Although open process innovation can be a lucrative strategy for those firms that make the first move, there are serious hurdles too:
First, it is obvious that open systems can and will be gamed. Cynical players will—at least in the short-term—get more out than they put in. Open systems work best when powered by trust among all parties. But trust is fragile. In any open relationship, some partners will invariably be more open than others at any given time. Pessimists can use such distortions to declare openness as overly risky. The way to get them on board is to present them with figures that demonstrate that open firms win more than they lose in the long term.
Second, regardless of how open a firm is, not much happens if people are not receptive to outside ideas. Contravening the not-invented-here syndrome is an important task of management. Building a culture of openness is not a quick fix. Like trust, it is harder to gain than to lose. Managers must start with the man in the mirror.
In the emerging industrial revolution, those that play fast and open can gain a competitive advantage. The point, of course, is that not all companies should go completely open. Especially it can be detrimental in the cases in which a competitive advantage stems from proprietary process innovations. Closed innovation is however not new for firms; openness is. Many companies can unlock another level of competitiveness using open process innovation.
Krogh, G.v., T. Netland, and M. Wörter, Winning with open process innovation. MIT Sloan Management Review, 2018 (Winter).