Open Versus Closed Innovation free essay sample

Open Versus Closed Innovation BY celestel 979 A Critical Look at the Effects of In the Innovative Firms of the Twenty-first Century June 17, 2010 Abstract In todays 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 nnovation and recommendations will be made for future research in this area. Introduction Background 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 RD. We will write a custom essay sample on Open Versus Closed Innovation or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 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 RD f 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 RD 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 pproach 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 Closed Innovation The main theory behind Closed Innovation is the belief that successful innovation requires control (Chesbrough, 2003). Companies that follow the Closed Innovation (C) 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 Ђ 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 Leading the industry in RD investments results in coming up with competition the best and most ideas and eventually in winning the competition Restrictive IP management must prevent other firms from profiting from the firms ideas and technologies (Herzog, 2008) Cl companies attempt to do everything on their own from innovative ideas, evelopment, 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 pr ofitable 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 Cl 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 nto a successful innovation the market can use. The main reason a company would choose Cl would be because they are scared of having their intellectual investments stolen by their competitors (Herzog , 2008; Chesbrough, 2003). [pic] Open Innovation Companies have reached the understanding that not all innovations have to originate internally and that if they do have an internal innovation and do not have the ability to act upon it they can still profit from it by partnering, Joint ventures, licensing or selling the innovation to another company. In Open Innovation (01) companies must ind a balance between keeping important internal secrets and still working with other companies to gain and produce valuable ideas, processes, resources, finances and support (Herzog , 2008). Companies that follow the 01 model (see Figure 2) believe in the following principals: Not all of the smart people work for us, so we must find and tap into the knowledge and expertise of bright individuals outside our company External RD value We dont have to originate the research in order to profit from it Building a better business model is better than getting to market first If we make he best use of internal and external ideas, we will win We should profit from others use of our intellectual property, and we should buy others intellectual property whenever it advances our own business model (Chesbrough, 2003) 01 encourages the Joining of resources from firms across all aspects of the value chain. Companies now realize that innovations they cant use or can be used further by other companies can lead to additional profits that they could have never obtained on their own (Almirall, Casadesus-Masanell, 2010). Kodama, (2005) expands 01 even further to talk about creating strategic communities See Appendix 1), a convenient process of speeding up a firms innovation. To be able to quickly acquire a variety of knowledge of great use, managers from different areas, from inside and outside the firm, can make a strategic community with internal and external members, which could involve customers. A huge benefit is that strategic communities are not bound by the same limitations as the official organization. Now that we have explored what Cl and 01 is we will now go on to look at why one of the methods might be better then the other for companies competing in the twenty- irst century and why companies decide to choose one either Cl or 01. Open versus Closed Innovation 01 involves risk such as knowledge and sensitive information leakage and the risks must be weighed against the benefits that would be gained from participating in 01. One more trouble with 01 is that well some areas open up to help the flow of knowledge it has been found that to keep sensitive information secure there has actually been a reduction in the amount of information being share between internal departments which could effect the companies internal innovation (Trott Hartmann, 2009). It has been found that 01 is especially needed in fields such as knowledge-intensive industries where competition is strong and companies need to work together to be able to gain a competitive advantage in the field (Trott Hartmann, 2009). Almirall Casadesus-Masanell, (2010) study showed that 01 works better then Cl for partnerships that are fixed and have low to medium complexity levels but they also found that when there is high complexity involved that Cl is the best method to follow. Another discovery was that the benefits can be greater in flexible partnerships over fixed partnerships. The model of flexible partnerships effectively says, If you cant fgure out how to put the pieces together internally (confgure two subsystems optimally), it is critical to have lots of different pieces (complementary subsystems) to choose from and know how to put them together externally. (Almirall Casadesus- Masanell, 2010) Chesbrough and Crowther (2006; as sited in Aylen, 2010) said that 01 traditional and mature industries. A big contrast between 01 and Cl is how they go through their idea lists. Cl managers go through and proceed with the ideas they see as beneficial to their company and iscard what they see as bad ideas or ideas they know their firm does not have the resources to accomplish. Whereas a 01 manager would go through their idea list and sort them into three categories, innovations their company can pursue internally, ideas they can approach other companies about, and ideas that will not work at all. Therefore the 01 model gets to profit from the ideas that the Cl model would have otherwise discarded or stored for a later date (Chesbrough, 2003). Even though 01 has been adapted by many organizations as the best way to be successfully innovative the theory is not perfect. Trott Hartmann, (2009) point out that 01 is very linear and does not suggest any feedback or feed-forward mechanisms unlike the newer innovation models such as the Cyclic Innovation Model (Berkhout, A], Patrick van der Duin, Dap Hartmann Roland Ortt,(2007), cited in Trott Hartmann, 2009). This newer model suggest feedback and feed-forward techniques and also that the innovation process is cyclic, meaning new innovations grow from older innovations. Cl has been very successful for some companies such as Apple they swept the market with the iPod and this strategy and product put them back into the playing ield after have been struggling for years to catch up with the innovations of other major players. Another example of Cl is the Wii by Nintendo which was extremely innovative with their new product features (Almirall Casadesus-Masanell, 2010). Some very large companies have tried Cl techniques and had some devastating effects as a result, such as IBM and Xerox but both these examples were able to overcome these problems with the help of 01 techniques. Procter and Gamble and Philips have successfully adapted 01 and have gone so far as to hold conferences on he topic and even published their own reports on the subject. Trott Hartmann, (2009) provide a list of companies and the reasons they choose to become part of a strategic alliance (See Appendix 2). It has been noted by Chesbrough, (2003) that near the end of the 20th century a number of things happened that caused Cl to be taken into question by many firms.