Closed and Open Models of Innovation

Closed and Open Models of Innovation

During the 20th Century, companies achieved competitive advantage by funding their own research laboratories. Many carried out fundamental research (often undirected), developing new technologies out of which spun new products – even new industries. These proprietary, even monopolistic, products generated large profit margins which funded more research.

This is known as the ‘closed’ model of innovation. Research and development were vertically integrated in this innovation model, and barriers to market entry were huge. In the early evolution of this model, market research played little part.

The concept of closed innovation

Only a proportion of completed research projects resulted in patents, and only a fraction of these patents were taken on to the development stage – no marketable products were identified or capital was lacking. There were no specialists whose job it was to look at technologies and envision products. IBM famously carved its initials on a slice of silicon at the atomic level, but at the time few, if any, realised where it would lead.

In many cases, companies have developed ground-breaking technologies, but have failed to capitalise on them. How about Xerox – they make photocopiers, don’t they? Yes, but they did more – the ‘GUI’ user interface concept was first developed in the Palo Alto labs of Xerox. It was Apple that made it a marketable concept in their ‘Lisa’ computer. Then Microsoft’s ‘Windows’ followed on Apple’s heels and the rest is history – including the lawsuits.

Although Apple had Steve Jobs, who was a true product visionary, a company cannot count on having one. Keeping a technology within a firm’s boundaries limits opportunities to harness external expertise, generate visions and exploit cross industry-sector opportunities.

Other companies that could have utilised a proprietary technology by leasing it would have created a win-win situation for both. Similarly, the firm itself could have licensed technologies created by other firms.

As the 20th Century ended, many notable failures to capitalise on technology opportunity were raising questions about the closed innovation model, whilst the business landscape was changing, with:

  • Increased options for unused technologies.
  • Increased availability of venture capital.
  • Increased mobility of skilled & knowledge workers.
  • Increased availability of outsourcing partners that are highly capable.
  • Increased strategic market research into social, technology and lifestyle trends.
  • This led to the concept of open innovation.

Open Innovation

In this concept, the boundaries of the firm are porous. Un-utilized technologies in the firm are now licensed to other firms, saving revenue and time. Importantly, the firm (the technology owner) is able to capitalise on market opportunity. Internal focus is on those technologies that are useful to the firm’s core business – effort and capital is not diluted.

The Innovation Business Model

In business, technology is only useful if it is commercialised. The ways of doing this are to:

  • Use the technology in the existing business operations.
  • License the technology to other firms.
  • Launch a new venture using the technology.

These innovation business model options closely couple entrepreneurial inputs and economic outputs.

Rather than seeing entrepreneurs and venture capitalists as threats, technology owners can use them to test-market new products. Optionally, they may then bring the products back into the mainstream business.

Many large firms take the open innovation path by acquiring start-ups or forming alliances; others have set up their own internal venture groups which power their own innovation process.

The advantages of the open model are:

  • Monetization of non-core technologies.
  • Shorter time-to-market for promising technologies.
  • Multi-market potential is explored and exploited.
  • Testing alternative business models for new product/service concepts.

Clearly, it is the flexibility of the open innovation model that makes it so powerful, and it works well in negating the disadvantages of the closed model.