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Two announcements in the past two weeks -- by Unilever (NYSE:UL) and Eli Lilly and Company (NYSE:LLY) -- highlight ways companies tap the wisdom of crowds to supplement their research and development capabilities. This practice, called open innovation, seeks ideas from the public on new products or technologies, with the most useful ideas developed further by the companies.

Going outside to the public to spur innovative ideas is hardly new. A challenge in 1919 by Raymond Orteig, a French hotel magnate, offered $25,000 to the first aviator to fly non-stop from New York, to Paris. Charles Lindbergh famously won that prize, of course. More modern challenges are offered by the X-Prize Foundation for private-sector space flight vehicles, seeking to inspire the same kind of spirit that generated the Spirit of St. Louis.

Open innovation's use by companies takes the concept of rewarding ideas from the outside and makes it a part of the enterprise research and development strategy. With the demise, or in some cases outsourcing, of corporate research labs, open innovation can offer companies a steady stream of ideas without the overhead of expensive labs and staff. Companies then negotiate compensation and intellectual property rights with the submitters of the ideas.

Four open innovation strategies

Fitting open innovation into the larger corporate strategy and culture was the focus of a study published in the September 2011 issue of the MIT Sloan Management Review by management scientists Ulrich Lichtenthaler, Martin Hoegl and Miriam Muethel. The authors surveyed large German companies (sample of 211) and identified four types of corporate environment in addressing the potential of open innovation:

- Technology isolationists, comprising 36 percent of the respondents, invest solely in their own R&D and are not interested in tapping the wisdom of crowds, nor do they license their technologies to collaborators for development.

- Technology fountains, with 27 percent of the total, generate their own research discoveries that they license to a network of partners for further development; the authors cite a chemical company as an example.

- Technology sponges, representing 21 percent of the respondents, that are open to product development ideas from outside entities, but do little (if any) outbound licensing of their intellectual property. Cited as examples are pharmaceutical companies that in-license discoveries from small biotechnology enterprises and academic labs, and then commercialize the findings under their own brand names.

- Technology brokers represent the smallest of the four segments with 16 percent of the companies, that both seek product and service ideas from outside sources and out-license their discoveries for further development with partner enterprises. The authors gave one example, an electronics company that uses a variety of alliances, collaborations, and licensing arrangements for both product ideas and downstream development.

From sponge to broker

Unilever's announcement on 20 March suggests it is starting out with the technology sponge approach, where the consumer goods company posts its product development needs and seeks ideas from outside inventors to meet those needs. Its competitor Procter & Gamble (NYSE:PG) -- a pioneer among American companies in open innovation -- is moving into the broker model, forming joint ventures for development of technologies outside of its core businesses. One example is a deal with privately held plastics manufacturer Meredian Inc. to commercialize biopolymers first developed at P&G.

Eli Lilly & Company offers another example of open innovation, this one focusing on drug discovery. Lilly announced last September an initiative to open its automated high-throughput drug screening technology to external scientists to test molecules against known drug targets or new biological pathways or mechanisms. The company then follows up with those submissions of interest to Lilly -- in particular those addressing unmet cancer, endocrine, cardiovascular and neuroscience needs.

Earlier this month Lilly indicated more of a technology broker strategy as well. National Institutes of Health and Lilly announced on March 13, a partnership to use the company's open innovation program to screen the 3,800 compounds in NIH's pharmaceutical collection. That collection covers drug samples in NIH's Therapeutics for Rare and Neglected Diseases, as well as Computational Toxicology Research programs.

Screenings are expected take place over the next 12 to 18 months, with results made available online. The screenings could result in collaborations to test current drugs against new targets, or additional lab research to produce new medicines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: New Examples Of Open Innovation To Stimulate Company R&D