There is a theory in finance called The Efficient Frontier. In short, it states that for any given level of risk, there is an optimal portfolio strategy that will maximize the total return.
Expanded slightly, it posits that one should strategically allocate assets to avoid the "all eggs in a single basket" risk problem and furthermore that there is an intelligent deployment of assets across diversified asset classes to provide for an optimal return no matter how the world turns out (but given some level of acceptable risk). That is to say, we can't predict the future, so we make our best guesses across a basket of assets, hoping that some will go up, but knowing not all of them will.
I bring this up as a result of an interesting experience almost two weeks ago when my partner, Dave Bayless, and I had the opportunity to speak to a class of 1st year Kellogg (my alma mater) students about Open Innovation. One enterprising first year student, with a big smirk on his face, figured only the "weakest" companies would look outside for innovation. For clearly, any well-run company that embraced risk and rewarded its managers for pushing the envelope, could run circles around anyone else in developing new products. In this student's example, 3M embodies all that is wonderful in the world of great culture, awesome employees, and extraordinary brand.
With no disrespect to 3M, which is indeed a great company, it is simply wrong to think that you should (and even can) do new product development solely with payroll staff. It's analogous to investing all your assets in one company.
I'm going to posit in this post that Open Innovation, and the role that EIP plays in the world of Open Innovation is quite similar to portfolio theory and the concept of the Efficient Frontier. A company's staff represents one asset class; EIP represents another asset class, M&A represents yet another asset class, and tech transfer with universities might represent yet another asset class (and so on, encompassing literally dozens or hundreds of asset classes and sourcing streams). The smart new product development strategy is to leverage ALL of those assets classes into the operational and brand infrastructure and pick the best new product concepts among them ALL.
What's fascinating to me about this space is that I think there's an important difference between Open Innovation and the Efficient Frontier: with Open Innovation, the cost of opening your mind/organization to supplemental new product flows is almost zero. With the Efficient Frontier, it's a zero-sum game -- you have to allocate assets and have a fixed amount of money. With Open Innovation, you can explore multiple new product streams, at generally low cost, and pick the most promising new products that align with your brand and corporate strategy. Think "very big funnel" and "cream-skimming" linked at the nexus of senior decision-makers. Yes, at some point you need to focus and manage your "streams" smartly; but that's down the road. For now, open the taps and let a thousand flowers bloom and see who consistently shines brightly and wisely...
Only a fool looks a gift horse in the mouth. So those that don't open their minds to supplemental idea flow from Open Innovation are going to get religion as soon as they realize that as smart as any organization can be, it simply can't compete with the combined resources and creativity of an open collective of minds and energy deployed against satisfying unmet consumer needs. And when you realize that the cost of this stream is (a) close to zero on the front end, and (b) a couple points off the topline for royalty payments, this makes a ton of sense...
So, you read it here first. Open Innovation is to new product development what the Efficient Frontier was to portfolio theory. Only time will tell what asset class EIP is :)
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