From closed to open innovation

Part of: Open innovation

1. Closed Innovation

Henry William Chesbrough, Harvard Business School, notes that there is a paradigm shift in how companies commercialize industrial research. The old paradigm might be called Closed Innovation. It’s a view that says successful innovations require control. Companies must generate their own ideas and then develop them, build them, market them first, distribute them, service them, finance them and support them on their own. This paradigm counsels firms to be strongly self-reliant, because one cannot ever be sure of the quality, availability and capability of others’ ideas. This view suggests that we should hire the best and the brightest people, so the smartest people in our industry work for us. Further, we should control our intellectual property, so our competitors don’t profit from our ideas.

2. From Closed to Open Innovation

In recent years, several factors have continued to erode the underpinnings of closed innovation. One factor was the growing mobility of highly experienced and skilled people. When people left an organisation/company after working there for many years, they took a good deal of that hard-won knowledge with them to their new employer (although the new employer didn’t have to pay any compensation to the previous organization for that training). The logic of Closed Innovation was further challenged by the increasingly fast time to market for many products and services, making the shelf life of a particular technology ever shorter. Further, as well, the burgeoning amount of college and post-college training led knowledge to spill out beyond the corporate central research labs to companies of all sizes in many industries. Beyond that, when fundamental technology breakthroughs occurred, the scientists and engineers who made them were aware of an outside option that they had formerly lacked. If the company that funded these discoveries didn’t pursue them in a timely fashion, the scientists and engineers could pursue the breakthroughs on their own - in a new start-up firm. Most often those companies failed, but the ones that succeeded might achieve an initial public offering or be picked up at an attractive price, leading to great rewards. Other successful companies wouldn’t reinvest in new fundamental discoveries but, would look outside for another external technology to commercialize.

3. Open Innovation Defined

Open Innovation (OI) is a paradigm that assumes firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology. Under open innovation, both external and internal ideas are used to create value, and internal mechanisms are defined to claim some portion of that value. Open innovation assumes that internal ideas can also be taken to market through external channels, outside the current businesses of the firm, to generate additional value. Ideas can also start outside the firm’s own labs and can move inside. Open innovation allows the recovery of overlooked innovations. Now there’s a greater chance the projects will find value in a new market or be combined with other projects, because everything is more open and flexible. According to Dr. Chesbrough, “Not all the smart people work for us. We need to work with smart people inside and outside the firm. External R&D can create significant value; internal R&D is needed to claim some portion of that value. We don’t have to originate the research to profit from it. Building a better business model is better than getting to market first. If we make the best use of internal and external ideas, we’ll win. We should profit from others’ use of our knowledge, and we should buy others’ knowledge whenever it advances our own business model.”

Some industries have been in open innovation mode for a long time. The Hollywood film industry, for example, has innovated for years through a network of partnerships and alliances among production studios, directors, talent agencies, actors and scriptwriters. Modern investment banking has been using external ideas as well, adopting the new, exotic investment instruments devised by newly minted PhD’s or finance professors. These different industries can be located on a continuum, one end of which includes industries in which entirely closed innovation prevails, the other end containing industries with fully open innovation conditions. Many industries are in transition between the two paradigms: automobiles, biotechnology, pharmaceuticals, healthcare, computers, software, communications, banking, insurance, and consumer packaged goods, even military weapons and communication systems are examples. The locus of innovation in these industries is moving beyond the confines of the central R&D laboratories of the largest companies to start-ups, universities and other outsiders. In so doing, the company can renew its current business and generate new business. For an innovative organization/company in a world of abundant knowledge, this can be the best of times.

Part of: Open innovation