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(originally published by Booz & Company)


The Continuing Payoff from Open Innovation

The researchers found that a firm’s breadth of openness was related to performance — the more open it was, the higher the level of new and improved products as a percentage of sales. But there’s a tipping point after five linkages: Beyond this number, firms experience decreasing returns. The researchers say that this decline could come from a number of factors, including the cost of “over-searching,” when companies no longer have the ability to absorb large amounts of new information, and managers lack the time and attention to process important ideas. But the researchers note that only a tiny fraction of plants in the study used more than five linkages.

For the rest, the authors write that there are two possible reasons that firms get better at learning how to innovate when they have a history of looking beyond their own R&D departments. The first is that companies improve their ability to juggle multiple external relationships. For example, certain in-house teams might work on a regular basis with certain types of innovation partners, such as university labs, thereby lowering the cost and increasing the return from a given set of relationships. The second reason is that the management team might become more open to new ideas as it learns to process the information coming from different forms of external links.

Overall, the researchers conclude that the lessons learned by a management team from handling multiple relationships carry over to future efforts, making the process more efficient down the line. The researchers note that prior linkages involving customers — whether through focus groups or focused product trials — were the most important in boosting the effect of current ties. In other words, knowing what your customers have historically valued is vital when introducing new products or services.

The study’s results imply that investing time in learning how to manage outside partnerships — and in deciding which ones bring the highest returns — will pay off dramatically.

“Time spent even in relationships that do not pay off in the short run need not be time wasted,” the authors write. “Learning which relationships not to pursue is an important part of the learning process, and may help to make future linkages more productive.”

Bottom Line:
Firms can carry forward the lessons they have learned from innovation projects involving outside partners. The larger the breadth of a firm’s external links, the higher the level of new product sales. But only to a point: After five outside links, companies become saturated with new information and face diminishing returns.

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