By Langdon Morris

There are six distinct innovation views that typically need to be integrated into one clear perspective in order to come out with the best possible results: three outsider viewpoints and three insider perspectives: Outsider Perspectives – Knowledge Channel Innovation, Peer-to-Peer Innovation, Outside-in Innovation; Insider Perspectives – Technology-Driven Innovation, Bottom-Up Innovation, Top-Down Innovation. This is Part 3 of a six-part series examining each of these perspectives.

During the last twenty years there has been a significant shift in the practice of R&D as companies have gradually shifted from a closed model of R&D work to a more open approach. The changes at Proctor & Gamble exemplify this shift.

Proctor & Gamble
In the mid-1990s P&G opened an enormous research center outside of Cincinnati, which brought together thousands of researchers who had formerly worked in labs scattered across rural Ohio. The purpose of the center was to accelerate the development of new products across all of P&G’s many product groups. The massive complex was designed to keep the researchers on-site and to foster interaction among them to stimulate breakthroughs.

To a significant extent the effort was not a success, largely due to some design flaws that detracted from the facility. But P&G’s insular culture was also part of the problem. This changed in 2000 when A.G. Lafley took over as P&G’s CEO. Lafley announced a major new R&D initiative through which it was anticipated that more than 50 percent of P&G’s new product ideas would come from outside the company, a radical shift for the healthcare giant – P&G researchers would scour the world for outside inputs on new products. As a result, P&G reported that R&D productivity increased by more than 60 percent, and during the last two years more than 100 new P&G products have been significantly influenced by ideas provided by outsiders. As an oft-admired and much studied corporate icon, P&G’s success with outside-in innovation has not gone unnoticed.

The formerly secure enclaves of R&D are being cracked open by a new awareness that staying within the walls of our own thinking may not bring the needed depth and variety of inputs. The power of the outside-in process is now widely understood. (This is not a new insight – in 1998 Eric von Hippel pointed out, in his book The Sources of Innovation, that in some industries more than 80 percent of innovations come from customers.)

Eli Lilly and Company
Many other companies that maintain huge R&D departments are also leveraging outsider insights and capabilities. An online tool recently launched by Eli Lilly and Company called Innocentive matches scientists from around the world with specific problems that large companies pay them to solve. There are more than 70,000 of these scientists in 150 countries, many of whom participate in vast, national networks of highly trained specialists in Russia, India and China. Innocentive refers to this process as “distributed innovation,” and Lilly cites a case study in which a retired chemist solved a challenging problem for the company and was paid $25,000 for the solution, far less than it would have cost Lilly to obtain the same result using internal resources. This process is also referred to as “open innovation.”

The advent of outside-in processes has been driven largely by the Internet, which makes it possible for individuals and companies to interact with a broad external community of people. Websites, blogs, chat, instant messaging and email are making virtual communities into effective work teams that link insiders with outsiders.

Missha
Another compelling example of outside-in innovation is the South Korean cosmetics company Missha. Missha began in 1998 as a wholesale manufacturer of high quality cosmetics that sold at prices far lower than many of its competitors. Today the company has more than 500 products that sell for less than five dollars.

Missha built its Internet business via its online portal for women, BeautyNet, which it uses proactively to learn from its customers. BeautyNet has attracted more than two million members who provide feedback and ideas to guide the development of new Missha products. In effect, Missha has created a vast external network – this pool of customer knowledge has significant influence on the evolution of its product line. On the strength of this powerful and innovative business model, Missha expanded quickly into storefront retail and now has more than 250 stores worldwide.

Outside-in Collaboration
Why, aside from specific financial rewards, would anyone spend their time helping your company? Customers want to be part of the business and they want to be insiders with the companies and brands they trust. Savvy businesses are finding meaningful ways for customers to become involved. By using its customer network to help shape its own product line, Missha has assured itself a compelling source of market insight, has enhanced the long-term loyalty of a tremendous number of people and also created a hugely effective volunteer sales force.

American quantum chemist and biochemist Linus Pauling said that the best way to get a good idea is to get a lot of ideas. A few hundred, or even a few thousand, people working inside of an organization can develop a lot of ideas, including many good ones. When a group’s efforts are complemented by hundreds, thousands or millions of outsiders, the likelihood of creating more good ideas increases substantially. The challenge is to organize these inputs in a productive way. In the competitive global knowledge marketplace, outside-in innovation is – and will remain – tremendously important.

About the Author:
Langdon Morris is a partner of InnovationLabs and author or co-author of six books. His most recent work, “Permanent Innovation: The Definitive Guide to the Principles, Strategies, and Methods of Successful Innovators,” is available as a free download at http://www.permanentinnovation.com. Contact Langdon Morris at lmorris (at) innovationlabs.com or visit http://www.innovationlabs.com.