Henry Chesbrough's open innovation paradigm promised organizations access to a world of external ideas, technologies, and talent. Two decades later, the evidence reveals a more complicated reality: many companies that embraced open innovation found themselves hollowed out, dependent on external sources they couldn't effectively leverage.

The problem isn't open innovation itself—it's the naive assumption that opening boundaries automatically creates value. Organizations that successfully navigate this transformation understand a counterintuitive truth: you must strengthen internal capabilities to benefit from external knowledge. The companies that fail treat open innovation as outsourcing by another name.

This creates a strategic paradox every innovation leader must solve. How do you systematically tap into the global innovation ecosystem while preserving the distinctive capabilities that define your competitive advantage? The answer lies in understanding absorptive capacity, designing effective boundary-spanning mechanisms, and making deliberate portfolio decisions about what stays inside versus what comes from outside.

Cohen and Levinthal's concept of absorptive capacity explains why some organizations transform external knowledge into breakthrough products while others remain passive consumers of ideas they never commercialize. Absorptive capacity is an organization's ability to recognize valuable external knowledge, assimilate it, and apply it commercially. Without this capability, open innovation becomes an expensive knowledge tourism program.

The critical insight is that absorptive capacity requires prior related knowledge. Organizations cannot simply purchase external innovation and expect integration to happen automatically. Internal R&D serves a dual purpose: it generates innovations directly and develops the expertise needed to understand, evaluate, and adapt external innovations. Companies that gut their internal research to fund external partnerships often discover they've lost the ability to benefit from those partnerships.

Consider pharmaceutical companies that shifted heavily toward in-licensing drug candidates. Those that maintained strong internal discovery capabilities could effectively evaluate candidates, anticipate development challenges, and integrate acquired molecules into their development pipelines. Those that dismantled internal research found themselves unable to distinguish promising candidates from expensive failures—they'd lost the knowledge required to make good decisions.

Building absorptive capacity requires investment in what appears redundant. You need internal expertise in areas where you're also seeking external knowledge. This feels inefficient but creates the cognitive infrastructure for effective technology transfer. The goal isn't to develop everything internally—it's to develop enough internally that external knowledge becomes comprehensible and actionable.

Takeaway

Before expanding external innovation sourcing, honestly assess whether your organization has sufficient internal expertise to recognize, evaluate, and integrate that knowledge. Absorptive capacity isn't automatic—it's a capability that requires deliberate investment in seemingly redundant internal research.

Knowledge doesn't flow across organizational boundaries automatically. It requires deliberate structural and process elements that enable translation between different contexts, languages, and mental models. Boundary spanners are individuals and systems that bridge the gap between external knowledge sources and internal application contexts. Without these mechanisms, even valuable external knowledge remains stranded outside.

Effective boundary spanning operates at multiple levels. Individual boundary spanners possess both deep technical expertise and unusual social skills—they can speak the language of academic researchers, startup founders, and internal business units. They translate not just information but context, helping internal teams understand why external innovations matter and how they might apply. These individuals are rare and valuable, yet many organizations underinvest in identifying and developing them.

Structural boundary spanning creates formal interfaces between internal and external innovation worlds. Technology scouting units, university partnership offices, and corporate venture capital arms serve this function when designed correctly. The key is ensuring these structures connect meaningfully to operational units that can act on identified opportunities. Too often, scouting functions become disconnected from business units, generating impressive reports about external innovations that never influence actual product development.

Process-level boundary spanning involves routines for systematic external scanning, evaluation protocols that compare external options against internal development, and integration processes that adapt external knowledge to internal contexts. Procter & Gamble's Connect + Develop program succeeded partly because it created systematic processes linking external technology identification to internal commercialization pathways. The external innovation wasn't just identified—it was channeled through structured processes that ensured action.

Takeaway

Map your current boundary-spanning mechanisms honestly. Identify whether you have individuals who can translate between external and internal contexts, structures that formally connect external scanning to internal decision-making, and processes that ensure identified opportunities actually reach teams capable of acting on them.

The most consequential open innovation decisions involve determining what to keep inside versus what to source externally. This isn't a binary choice—it's a portfolio decision that must align with competitive strategy. Core competencies require internal development; complementary capabilities can often be sourced externally; and commodity components should typically be externalized. The challenge is correctly categorizing each element.

Prahalad and Hamel's core competence framework provides initial guidance but requires dynamic interpretation. Core competencies are capabilities that provide sustained competitive advantage, are difficult for competitors to imitate, and can be leveraged across multiple products or markets. These must be developed and controlled internally. However, what constitutes core evolves as industries change. Kodak's film chemistry expertise was core until digital imaging redefined the industry—clinging to internal development of declining capabilities while missing emerging ones proved fatal.

Complementary assets occupy the middle ground. These capabilities are necessary for commercialization but don't differentiate your offering. Effective open innovation strategies often involve partnering for complementary capabilities while intensifying internal investment in truly core areas. This requires honest assessment of where your differentiation actually lies—not where you wish it did or where it historically resided.

The decision framework must also consider appropriability conditions. When intellectual property protection is strong and markets for technology function well, external sourcing becomes more attractive. When knowledge is tacit, cumulative, and difficult to transfer, internal development often proves more effective regardless of strategic importance. Your open innovation portfolio should reflect both strategic positioning and the practical realities of knowledge transfer in your specific technological domain.

Takeaway

Conduct a rigorous portfolio review asking three questions for each capability: Does this differentiate us competitively? Is this knowledge transferable through market mechanisms? How is the strategic importance of this capability likely to evolve? The answers should drive your internal-versus-external development decisions.

Open innovation succeeds when organizations treat it as capability augmentation rather than capability replacement. The companies that thrive maintain strong internal competencies while systematically accessing external knowledge—they become better at both internal development and external integration simultaneously.

This requires investing in absorptive capacity before expanding external sourcing, building robust boundary-spanning mechanisms at individual, structural, and process levels, and making deliberate portfolio decisions about what truly must remain internal.

The goal isn't maximum openness—it's strategic openness that strengthens rather than hollows out your organization's distinctive capabilities. That balance, continuously adjusted as technologies and markets evolve, determines whether open innovation transforms your organization or merely diffuses what once made it exceptional.