Part 2 : Open innovation tool one: prize challenge. Chapter 2: Unbundling of the product through open innovation strategy.

This post is part of a blog series on “In what ways can Organisation(s) benefit from open innovation through challenge-based design sprint? ”( A thesis study on SprintHacks 2016, Singapore )

Feel free to follow Part 1 and Part 2 of Chapter 1 & Part 1 of Chapter 2.

A few key questions remain: is outside-in open innovation the answer to an innovator’s dilemma? Is OI the new paradigm to encourage organisations to be more innovative, and how? Two of its tools — Prize Challenge and Design Thinking — were able to answer that.

What is prize challenge?

Often, SSs engage with an innovation intermediary to act as an agent/medium to facilitate the OI adoption process in the form of a prize challenge. A prize challenge offers a reward to whoever can first, or most effectively, meet a defined challenge (Nesta.org.uk, 2012). There is a growing range of other challenge prize approaches, and the conduct of each challenge may be similar but, generally, they come in two outcomes:

1) Prestigious/recognition prize: 

The sponsor/prize challenge organiser (PCO) prescribes the goal but not the who or how, and offers a financial incentive to the first or most effective SP that meets defined challenge criteria in exchange for a solution, rather than past achievements such as the Nobel Peace Prize & Ansari X-Prize (op.cit.).

2) Inducement prizes: 

Long-term development oriented, SSs are interested in engaging in future commercial agendas with SPs through joint ventures, licensing etc. after the post challenge phase such as Gates Foundation’s Grand Challenges Explorations programme.

The presence of these platforms either helps other SS(s) develop crowdsourcing ideas from widely distributed user innovation communities (Hippel, 2005) or helps inventors find more markets where their own ideas can be used by others to mutual benefit (Chesbrough, 2006). This broadcast search/crowdsourcing approach is often applied to tasking a crowd with potentially empirically provable problems, often scientific, when doing so in-house is perceived too high-risk and /or costly (Marjanovic, Fry and Chataway, 2012). Thus, SS(s) is engaged in the intermediary/challenge, such as Innocentive and X-Prize, to increase innovation productivity and to harness creativity gains from a distributed network of contributors (Marjanovic, Fry and Chataway, 2012). In other words, the contests shift the risk of innovation from the patrons to the solver community (Hintz, 2010) into the quality improvement of solutions and efficient use of corporate resources (cost reduction) (Katarzyna and Anna, 2015).

Prize challenge framework

Figure 10: A typical prize challenge framework (McKinsey & Company, 2009)

In Figure 10, a five steps framework of prize development and delivery is outlined:

1) Goal setting: 

To convert aspiration into a concrete set of prize objectives, one of the most difficult aspects to conduct an effective prize, sponsors/PCOs must: 1) Define a broad and compelling aspiration (e.g. lunar exploration) 2) Have specific achievement objectives that the prize challenge can fulfil (e.g. increase the company’s annual sale by 30%)

2) Building a prize strategy:

PCOs need to establish a deep understanding of the stakeholder/SS’s motivations and prize objectives before choosing the types of prize that appeal to the SP’s motivations and those objectives.

3) Designing a prize Four major tasks are involved in designing a prize:

1) determining the participants 

2) defining participant rights

3) creating the competition’s rules 4) setting the award

Designing a prize can be difficult as each of these tasks is inter-dependent and trade-offs need to be taken into account.

4) Creating and executing an effective prize process

The prize fails when the sponsors fail to understand a number of resources needed beyond just prize capital. It requires additional finances for publicity to attract challenge awareness, complete the challenge process, and celebrate by amplifying the prize impacts by sharing the lessons learned and supporting stakeholders, in order to maximise desired participation, problem-solving and impact.

5) Post prize:

The prize’s life cycle doesn’t end on the day the award is given. Much of the prize’s impact can only be generated after the reward is given, such as further investment can be reinforced to take winning ideas to scale. Or SSs/prize sponsors can learn from the findings generated by the SP communities.

Challenges in the prize challenge

Such risks can be managed by an innovation broker, though accessing external information/knowledge may face challenges from (Chesbrough, 2006):

1) Managing and protecting identity — in some circumstances, some SSs and SPs might prefer to remain anonymous for as long as possible, while others might be reluctant to complete the transaction unless the other party’s identity, and IP position, is known.

2) Values of the intermediary — how can the values of the intermediary’s service be measured and demonstrated to their client, including the arrangements beyond the intermediary’s control, and what must occur in order to make an idea or technology valuable?

3) Creating or accessing a two-sided market — intermediary’s function very well when the market is full of sellers and buyers. If the market contains fewer sellers and buyers and is highly illiquid, they don’t function nearly so well.

4) Trust in novelty — the concept of an innovation intermediary is itself something of a novelty; how can intermediaries develop the trust and reputation necessary to convince buyers and sellers to confide in them?

Click here to read on Part 3: Open innovation tool two: Design Thinking. Chapter 2: Unbundling of the product through open innovation strategy.