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Opening Up the Innovation Process

MIT Sloan faculty and alumni offer insights into leveraging innovative ideas from outside the organization.

Alan  MacCormackAlan MacCormack

When executives think about leading their businesses more effectively, their first instinct often is to consider what to do within the organization itself: the people, systems, and resources within the company. Increasingly, however, savvy executives are thinking much more broadly about tapping into opportunities outside the limits of the organization, as well. In practice, this might mean collaborating with customers, Twitter followers—and even volunteers with no direct link to the business.

In many ways, the MIT Sloan School of Management is at the center of this open management revolution. The Fall 2013 issue of MIT Sloan Management Review, which contains several articles on innovation and whose authors include MIT Sloan alumni and faculty, underscores this role. Three articles featured in a special section titled, “Leveraging External Innovation,” examine how organizations can use open innovation to generate and select good ideas and how to collaborate with innovators who are not employees and may not be driven strictly by financial incentives.

“Companies are searching for better ways to identify and exploit novel solutions,” write Alan MacCormack, Fiona Murray, and Erika Wagner in their article, “Spurring Innovation Through Competitions.” (MacCormack earned an SM at MIT Sloan and now teaches at Harvard Business School; Murray is the associate dean for innovation, a professor of entrepreneurship, and faculty director of the Martin Trust Center for MIT Entrepreneurship at MIT Sloan; and Wagner is an MIT alumna and former executive director of the X PRIZE Lab@MIT.) According to the authors, companies are “increasingly … discovering that many of the very best ideas lie outside their organizations, in an ecosystem of potential innovators who possess wide-ranging skills and knowledge. To discover and attract these contributors, organizations are launching competitions and offering prizes.”

Through competitions, MacCormack, Murray, and Wagner observe, organizations are better able to tap external innovators capable of producing new ideas. For example, when Netflix, the on-demand video and DVD rental company, wanted to improve its algorithm for recommending movies to customers, it announced a $1 million prize. Among the entrants the competition attracted were graduate students from China, researchers from Bell Labs, and retired management consultants. Between October 2006 and July 2009, Netflix received more than 44,000 entries from more than 5,000 teams.

Not all submissions produced better results: During the first 33 weeks of the Netflix competition, more than two-thirds of the entries performed worse than the company’s own algorithm. But several dozen entries beat the benchmark by 5 percent, and the winning entry exceeded the benchmark by more than 10 percent, proving that patience (the competition spanned almost three years), cash ($1 million), and attention to detail (after all, the company had to evaluate 44,000 entries) can produce payoffs. Nonetheless, the authors note, organizations need to understand that competitions can have drawbacks, including potential overlap with ongoing internal activities and uncertainty about who actually owns the intellectual property.

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