Innovation is the lifeblood of progress and competitiveness in today’s fast-paced business world. Organizations constantly seek new ways to create and deliver value, and the approach they take to innovation plays a pivotal role in their success. Two contrasting models of innovation have emerged as prominent strategies: closed innovation and open innovation.
Introduction to Closed Innovation and Open Innovation
Closed Innovation
Closed innovation, also known as traditional or internal innovation, is an innovation model where an organization relies primarily on its internal resources, research and development (R&D) efforts, and expertise to generate new ideas, develop products, and drive innovation. In a closed innovation model, the organization typically does not actively seek external input or partnerships for innovation but instead focuses on developing ideas and technologies internally.
Open Innovation
Open innovation, on the other hand, is a collaborative and outward-facing approach to innovation. It recognizes that valuable ideas, technologies, and expertise exist both inside and outside the organization. In an open innovation model, organizations actively engage with external partners, customers, suppliers, universities, startups, and the broader innovation ecosystem to co-create and leverage ideas and technologies. The flow of knowledge and innovations extends beyond the organization’s boundaries.
Characteristics of Closed Innovation
Closed innovation is characterized by the following key features:
Internal Focus: Closed innovation primarily relies on internal resources, talent, and capabilities for generating ideas, developing products, and solving problems. Research and development (R&D) departments play a central role.
Secrecy and Intellectual Property: Organizations following closed innovation models often emphasize protecting intellectual property (IP) and maintaining secrecy. They file patents and safeguard innovations from competitors.
Linear Innovation Process: Closed innovation typically follows a linear innovation process, where research and development activities occur sequentially within the organization’s boundaries, from concept to development, testing, and commercialization.
Limited External Collaboration: External collaboration is limited in closed innovation. Companies are less inclined to seek input, feedback, or partnerships with external entities in the innovation process.
Self-Sufficiency: Closed innovation assumes that an organization possesses the necessary resources and expertise to innovate independently, addressing market challenges and opportunities internally.
Characteristics of Open Innovation
Open innovation exhibits the following key characteristics:
External Engagement: Open innovation actively seeks external engagement and collaboration with a wide range of partners, including customers, suppliers, universities, startups, and other organizations in the innovation ecosystem.
Knowledge Sharing: In open innovation, knowledge flows bidirectionally between the organization and external partners. Ideas, technologies, and expertise are shared openly to co-create value.
Diverse Inputs: Open innovation welcomes diverse inputs and perspectives from external sources, recognizing that valuable insights and innovations can come from a variety of stakeholders.
Iterative and Flexible: The innovation process in open innovation is often iterative and flexible, with feedback loops that allow for adjustments based on external input and changing market dynamics.
Ecosystem Approach: Open innovation takes an ecosystem approach, viewing innovation as a collaborative effort involving a network of partners rather than a closed, internal function.
Advantages and Disadvantages of Closed Innovation
Advantages of Closed Innovation
IP Protection: Closed innovation models enable organizations to protect their intellectual property (IP) through patents, copyrights, and trade secrets, reducing the risk of IP theft or infringement.
Confidentiality: Companies can maintain the confidentiality of sensitive information, proprietary technologies, and strategic plans, preventing competitors from gaining insights.
Focused Resources: Closed innovation allows organizations to allocate their resources, including R&D budgets and personnel, more effectively toward specific innovation projects without external distractions.
Speed and Efficiency: Closed innovation can lead to quicker decision-making and innovation cycles, as organizations do not need to navigate complex external partnerships or negotiate agreements.
Total Control: Companies have full control over their innovation processes, enabling them to maintain a clear strategic direction and alignment with their business goals.
Disadvantages of Closed Innovation
Limited External Insights: Closed innovation models may lead to a lack of exposure to external insights, market trends, and emerging technologies, potentially causing companies to miss valuable opportunities.
Missed Collaborative Opportunities: Organizations may overlook opportunities for collaboration with external partners, startups, or academia, limiting their access to diverse expertise and resources.
Risk of Isolation: A closed innovation model can isolate companies from broader industry and technological developments, making them less adaptable to changing market conditions.
Slower Adoption: Closed innovation models may result in slower adoption of innovative solutions, as companies may need to rely solely on their internal capabilities to develop and commercialize new technologies.
High Costs: Maintaining comprehensive internal R&D capabilities can be costly, especially for smaller organizations or those operating in rapidly evolving industries.
Advantages and Disadvantages of Open Innovation
Advantages of Open Innovation
Access to External Insights: Open innovation allows organizations to tap into external insights, expertise, and emerging technologies, expanding their knowledge base and staying attuned to market trends.
Collaborative Synergy: Collaboration with external partners fosters synergy and creativity, leading to the development of innovative solutions that may not be achievable in isolation.
Risk Sharing: By sharing the risks and costs of innovation with external partners, organizations can reduce their financial exposure and increase the likelihood of successful outcomes.
Faster Time to Market: Open innovation can accelerate the time to market for new products and technologies, as organizations can leverage external resources and expertise.
Flexibility and Adaptability: Open innovation models are flexible and adaptable, allowing organizations to respond quickly to changing market dynamics and customer preferences.
Disadvantages of Open Innovation
IP Risks: Collaborative efforts in open innovation may expose organizations to IP risks, as sharing knowledge and technologies with external partners can lead to disputes or loss of control over innovations.
Complex Collaboration: Managing and coordinating collaborations with diverse external partners can be complex and require effective communication and relationship management.
Resource Allocation: Organizations may need to allocate resources to manage external partnerships, including legal, administrative, and coordination costs.
Competition for Resources: In open innovation ecosystems, multiple organizations may compete for the same external resources and expertise, potentially leading to resource scarcity.
Confidentiality Challenges: Balancing the need for openness with the protection of sensitive information can be challenging, as organizations must strike a delicate balance.
Real-World Examples of Closed and Open Innovation
Closed Innovation Examples
Apple Inc. (Closed Innovation): Apple has a long history of closed innovation. The company designs its hardware and software in-house, maintains strict secrecy around its product development processes, and controls its ecosystem, from device design to its app store.
Coca-Cola (Closed Innovation): Coca-Cola has traditionally relied on a closed innovation model. The secret formula for its signature beverage has been closely guarded for over a century, and the company maintains control over its product development and marketing strategies.
3.
Ford Motor Company (Closed Innovation): Ford has historically employed a closed innovation approach in the automotive industry. The company designs and manufactures its vehicles internally, from concept to production.
Open Innovation Examples
Procter & Gamble (Open Innovation): Procter & Gamble is a notable example of open innovation. The company actively collaborates with external partners and maintains a Connect + Develop program to source innovative ideas and technologies from outside its organization.
IBM (Open Innovation): IBM has embraced open innovation through initiatives like IBM Research Collaboratories and partnerships with universities and research institutions. The company actively engages with external researchers and experts to drive innovation.
LEGO (Open Innovation): LEGO employs open innovation to engage with its fan community and co-create new products. The LEGO Ideas platform allows fans to submit their design ideas, and successful concepts are developed into official LEGO sets.
Factors Influencing the Choice Between Closed and Open Innovation
The choice between closed and open innovation depends on several factors:
Organizational Culture: The prevailing culture within an organization, including its willingness to embrace external collaboration and risk, significantly influences the choice of innovation model.
Industry and Competitive Landscape: The industry in which an organization operates and its competitive landscape play a crucial role. Rapidly evolving industries may favor open innovation to stay competitive.
Resource Availability: The availability of internal resources, including R&D capabilities and financial resources, can influence whether an organization can pursue closed or open innovation effectively.
Risk Tolerance: An organization’s risk tolerance and its willingness to share knowledge and IP with external partners play a critical role in shaping its innovation approach.
Market Dynamics: The dynamics of the target market, including customer preferences, emerging trends, and the pace of technological change, can drive the need for openness and external collaboration.
Regulatory Environment: Regulatory constraints and legal considerations, such as IP protection and data privacy regulations, can impact the feasibility of open innovation.
Strategic Objectives: The organization’s strategic objectives and goals, including its desire for growth, market expansion, and technological leadership, can guide the choice of innovation model.
Conclusion
Closed innovation and open innovation represent two distinct approaches to fostering innovation within organizations. While closed innovation relies on internal resources and expertise, open innovation embraces collaboration with external partners and stakeholders. The choice between these models depends on an organization’s culture, industry, resources, risk tolerance, market dynamics, and strategic objectives.
In a rapidly changing and interconnected world, many organizations are adopting hybrid approaches, incorporating elements of both closed and open innovation to harness the strengths of each model. Regardless of the chosen approach, innovation remains a critical driver of success, and organizations must continually adapt their strategies to thrive in today’s competitive landscape.
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.
In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.
A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
