Core Competence Management in the Era of Open Innovation

By: Frank Mattes

“Core competences” are a major concept in managing innovations and technologies. In the era of Open Innovation, the established concept of core competence management needs to be updated. innovation-3’s Frank Mattes recently met with a group of 20 innovation / technology managers from leading firms to work out how this could be done – with the practitioner’s perspective in mind. In this article you will find the key results of the discussion.

Before Open Innovation (outside-in) gained wide-spread interest, innovation / technology managers used a quite straightforward approach for managing their firm’s technologies and capabilities. For the few “core competences”, no one from outside of the firm should be involved in innovation in order to prevent know-how drain – today we would call this a “closed innovation” approach. On the other hand, for the bulk of “non-core” competences, decisions on where and how external innovation partners should be involved were made on a case-by-case basis at the level of the individual innovation project.

Unfortunately, life is not that straightforward anymore. Open Innovation has found its way onto the Top Management agenda. CEOs, CTOs (and according to a recent article in the Wall Street Journal also increasingly CFOs) have become aware that a comprehensive and systematic open approach to innovation provides a significant upside potential (see also the in-depth article “How to implement R&D-driven Open Innovation”). As a consequence, they are asking their innovation / technology managers to systematically explore the relevant global expertise and make sure that it is used for the firm’s innovation.

In other words, many Top Managers are requesting from their innovation / technology managers to move beyond some initial crowdsourcing projects to a strategically based implementation of Open Innovation. In doing so, many firms find that the paradigm “Not all smart people work for us” is really true and are are surprised when they discover that the number of relevant external experts (“smart people”) is not just four times or ten times as large as the number of the internal experts. According to estimates by leading firms such as Procter&Gamble, Merck and Kraft Foods, the multiple is 50-200 (!).

Some tough questions for practitioners

…is the established definition of “core” still valid?

And this is where we run into some interesting questions. If one accepts these estimates, is the established definition of “core” still valid? And is the established division of closed / case-by-case-open approach for innovating in “core” / “non-core” competence areas still Best Practice?

To discuss these questions, innovation-3 invited a group of Open Innovation practitioners from leading German firms – coming from a range of industries, comprising Chemical, Automotive, Energy, Aviation, FMCG, Banking and Retail – for a cross-company exchange of Best Practices.

An open innovation view on core competences

In order to frame the discussion, it is important to see that these leading firms (and other leaders in Open Innovation) are applying open approaches to innovation in three major corridors: They innovate openly in

• business fields, in particular in new markets and business models (e.g. in Germany, major IT firms join forces with Automotive, Energy and Telecoms in order to provide “roaming” solutions on a national level for the payment infrastructure to charge stations for electric cars) or in extensions of the addressed markets (e.g. an Automotive tier-2 striving to become a tier-1 sub-system supplier)
• business processes, in order to build or to extend competitive advantages in core processes
• technologies, in order to improve time-to-market, R&D effectiveness, R&D efficiency and R&D financials

For the sake of simplicity we focused discussion on the third corridor – the first two can be handled accordingly.

From a practitioner’s perspective, technological core competences in the era of Open Innovation should satisfy six criteria: They …

1. are a source of competitive advantage (on a global scale),
2. allow for maintaining the superior competitive position fully in-house or with open approaches that are unique to the firm (e.g. Beiersdorf’s Pearlfinder ),
3. are hard to imitate,
4. provide potential to a wide variety of markets,
5. significantly contribute to the perceived customer benefits of the end product and
6. support the customer‘s value chain (in B2B markets)

The second point is interesting since it gives the practitioner an initial guidance which open approaches should be used: For core competences open approaches (e.g. innovation clusters, strategic innovation alliance, lead user integration, university co-operations or proprietary innovation networks) should be used that other firms may not be able to replicate because they lack e.g. the management capabilities, financial position or corporate image to do so. For non-core competences, open approaches to innovation that could be replicated by other firms (such as e.g. crowdsourcing via InnoCentive or Nine Sigma) are acceptable.

Where to be open and where not

However, this one-dimensional look at core competences is not good enough, since all technologies – and hence also the few core competences – have their life cycle. And so it may not be wise to invest valuable R&D resources into a technology that is at the end of its S-curve. As a consequence, a simplistic division into “core” or “non-core” may not be sufficient. Rather firms need to look at their all relevant technologies simultaneously with respect to their competitive position and the technological potentials.

In order to achieve this, an inventory of all relevant technologies should be set up as a first step. For instance, Procter&Gamble, the FMCG giant with ca. EUR 70 B revenue and product categories ranging from laundry care and small appliances to pet food and OTC medication, states that it operates in 150 technology fields. Among these are e.g. Analytical Chemistry, Biochemistry, Computational modeling, Perfumes and flavors, Packaging and Toxicology.

In a second step, all of the technologies in this inventory are plotted into a two-dimensional portfolio matrix.

Figure 1: Identifying in which technologies to be open and in which not

In this portfolio, the competitive position is the x-axis and the attractiveness of the technology the y-axis. The first dimension can be measured e.g. by how good the firm is in mastering the technology, by the potential to develop the technology in-house and by the extent to which the firm can secure the best external co-innovators using unique OI approaches. The second dimension can be measured e.g. by how far the technology is on its S-curve, how versatile the technology is and how it fits together with the other technologies. Additional data may be visualized in this portfolio, e.g. by choosing the size of the bubbles to represent the resources invested or the number of projects per technology.

In this portfolio diagram the upper right quadrant denotes the space where the firm should innovate in a closed way since it has competitive advantages in very attractive technologies. The upper left quadrant is a space that is very favorable for Open Innovation whereas the two lower quadrants describe a space in which openness in innovation should be decided on a case-by-case basis per technology.

Where to be open or not: the future perspective

While the methodology illustrated above is sufficient to support discussions about present technologies, it is not sufficient to support the future perspective since the technology base is constantly shifting. And these shifts may not be of an evolutional nature, they may be radical and disruptive.

Imagine for a second that your firm is in the lighting business. In the good old days of the light bulb your firm had to master three core competences: glass production, metal processing and engineering. In today’s lighting business, where LEDs are becoming the standard, you need to master some 30 technologies, among them Fine Organic Chemistry, substrates, glues, engineering, “getter” production, printing technologies for feed lines and light release.

These kind of radical technological disruptions are not happening in the lighting business alone. They happen in almost every industry at times – think about the media industry / Internet, the automotive industry / electrification of the powertrain or the chemical industry / biochemicals.

Should the firm build up the future (core) competence portfolio in a rather open or a rather closed approach to innovation?

Leading firms anticipate the change and prepare themselves accordingly. The big question in the era of Open Innovation is: Should the firm build up the future (core) competence portfolio in a rather open or a rather closed approach to innovation?

In order to answer this question in a holistic way, the portfolio matrix from above should be modified so that it also visualizes the anticipated future (potentially disruptive) technology base.

Figure 2: Identifying in which future technologies to be open and in which not

The good news is that the portfolio approach described above is flexible enough to accommodate future technologies as well. In the same portfolio, you might as well integrate future technologies and assess your firm’s current competitive position and the estimated technology attractiveness – as seen from today. Applying the quadrant thinking outlined above, one gets a solid recommendation whether innovation in these future technologies should be done rather open or rather closed.

A solid approach to technology management

Using the three-step process outlined above – inventory of technology, portfolio of the current technology base and portfolio of disruptive technologies – any firm can make good and solid judgments about where today’s and tomorrow’s core competences are. Additionally, the process gives a good decision support in order to answer the question: “In which technology fields should we innovate in an open way and in which in a closed way?”

By Frank Mattes