A Critical Look at the Effects of
Open Versus Closed Innovation
In the Innovative Firms of the Twenty-first Century
June 17, 2010
In today’s fast paced business world, which innovation method should companies adopt, open or closed innovation? In this paper we will explore the methods of closed and open innovation. Then we will explore the pros and cons of both innovation methods and discuss which method works better in the business world of the twenty-first century. After reviewing the results this paper explores the particle implications that innovative firms should be aware of regarding Open and Closed innovation and recommendations will be made for future research in this area.
Looking back even a few decades companies viewed innovation strategies very differently then they do today. It was believed that successful innovation needed internal control and secrecy from others in the market. Large corporations used to dominate the field of innovation because they were the only ones who could afford to invest it large scale R&D. Any company that tried to enter the market would have to find large amounts of resources to be able to even attempt to compete with the R&D of the large corporations (Chesbrough, 2003; Herzog , 2008; Aylen, 2010; Kodama, 2005; Trott & Hartmann, 2009).
In the current economy start-up companies have found ways to bypass the large R&D investments of the past. Instead of doing their own research these new entrance are getting their knowledge and technology from outside their company by either investing in relevant startup companies, or partnering with other companies up, down or horizontally on the value chain (Chesbrough, 2003).
With the expanding options on how to obtain innovative ideas, processes, and products the big question remains should companies used a closed or open approach to innovation? And does the open and closed methods work for all companies? (Almirall & Casadesus-Masanell, 2010)
In this paper we take a critical look at what closed and open innovation is, what the pros and cons are to both options, and try to determine if one method is better then the other in this current economy.
The main theory behind Closed Innovation is the belief that “successful innovation requires control” (Chesbrough, 2003). Companies that follow the Closed Innovation (CI) model (see Figure 1) believe in self-reliance and that they should follow these rules to succeed:
• “A firm should hire the best and smartest people
• Profiting from innovative efforts requires a firm to discover, develop, and market everything itself • Being first to market requires that research discoveries originate within the firm • Being first to market also ensures that the firm will win the competition • Leading the industry in R&D investments results in coming up with the best and most ideas and eventually in winning the competition • Restrictive IP management must prevent other firms from profiting from the firm’s ideas and technologies” (Herzog, 2008)
CI companies attempt to do everything on their own from innovative ideas, development, manufacturing, advertising, promotion, distribution, service and even financing. If the innovative ideas or projects are not pursued or are discarded part way they are stored internally and will not be profitable to the company or useful to the rest of the world unless they are used internally at a later date. This creates a great loss of many potentially great innovative ideas, products, services, and processes. If a company chooses CI it can be expect that many innovations will be lost as companies do not have the ability or resources to turn every idea or technology into a successful innovation the market can use. The main reason a company would choose CI would be because they are scared of having their intellectual investments stolen by their competitors (Herzog , 2008;...
References: Berkhout, AJ, Patrick van der Duin, Dap Hartmann & Roland Ortt, (2007), The Cyclic
Nature of Innovation: Connecting Hard Sciences with Soft Values
Figure 2 – The Open Innovation Model
Figure 3 – Managerial Implications for working with OI in strategic communities (Kodama, 2005)
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