Closed and open models of innovation

During the 20th century, companies gained a competitive advantage by financing their own research laboratories. Many conducted fundamental (often undirected) research, developing new technologies from which new products, even new industries, arose. These proprietary, even monopolistic, products generated large profit margins that funded further research.

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

The concept of closed innovation

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

In many cases, companies have developed innovative technologies but have not capitalized on them. What about Xerox? They make photocopiers, right? Yes, but they did more: the ‘GUI’ user interface concept was first developed in Xerox’s Palo Alto labs. It was Apple that made it a marketable concept in its ‘Lisa’ computer. Then Microsoft’s ‘Windows’ followed in Apple’s footsteps and the rest is history, including lawsuits.

Although Apple had Steve Jobs, who was a true product visionary, a company cannot count on having one. Keeping a technology within the confines of a company limits opportunities to tap into outside expertise, generate insights, and exploit opportunities across industry sectors.

Other companies that could have used a patented technology by leasing it would have created a win-win situation. Similarly, the company itself could hold licenses for technologies created by other companies.

As the 20th century drew to a close, many notable failures to capitalize on the technological opportunity raised questions about the closed innovation model, while the business landscape was changing, with:

• Greater options for unused technologies.
• Greater availability of risk capital.
• Increased mobility of skilled workers and knowledge.
• Increased availability of outsourcing partners that are highly capable.
• Major strategic market research on social, technological and lifestyle trends.
• This led to the concept of open innovation.

open innovation

In this concept, the boundaries of the company are porous. Technologies not used in-house are now licensed to other companies, saving revenue and time. Importantly, the company (the owner of the technology) can capitalize on the market opportunity. The internal focus is on those technologies that are useful for the company’s core business: effort and capital are not diluted.

The business model of innovation

In business, technology is only useful if it is commercialized. The ways to do it are:

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

These innovation business model options closely combine business inputs and economic results.

Instead of seeing entrepreneurs and venture capitalists as threats, technology owners can use them to test new products on the market. Optionally, they can return the products to the main business.

Many large companies take the path of open innovation through the acquisition of new companies or the formation of alliances; others have established their own groups of internal companies that drive their own innovation process.

The advantages of the open model are:

• Monetization of non-core technologies.
• Shorter time to market for promising technologies.
• The potential of multiple markets is explored and exploited.
• Test 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 to offset the drawbacks of the closed model.