Two views: Beyond open and closed innovation

Until the early 21st century, most innovation was closed. That is, it occurred within the boundaries of an organization and was performed by the company’s own employees within its internal R&D function. This model is based on a number of assumptions that have changed radically in today’s marketplace. These include the notions that internal resources are most reliable and trustworthy and always superior, and that closed doors stave off competition.

However, in 2006, the concept of open innovation was popularized by Professor Henry Chesbrough in his book, Open Innovation: The New Imperative for Creating and Profiting from Technology. Under the open innovation model, by inviting customers, partners, and other stakeholders to participate in the innovation process, companies can and should take advantage of the wealth of knowledge that exists outside of the organization, and, conversely, share their knowledge when doing so does not jeopardize their own competitive positions. Open innovation employs such techniques as crowdsourcing, whereby large numbers of people are invited to contribute ideas around an innovation goal. Open innovation is greatly facilitated by the meteoric rise of social media, blogs, wikis, and other Internet-enabled communications.

Both models are employed today and each has its place, depending on a company’s innovation goals. Have you thought about which model is right for you?

Beyond open and closed innovation

While for discussion’s sake it’s convenient to consider these two models as discrete approaches to innovation, the fact is, they are rarely applied in a vacuum. Why? Innovation is almost never an either/or choice. As most companies have discovered, their innovation goals involve a complex mix of closed and open innovation that is uniquely tailored to their innovation objectives.

So how is this mix configured? One approach is to analyze each innovation project through the prism of three questions: 1) What parts of the project are open to whom? 2) For what purpose? 3) Who gets to extract the value? If these questions are asked and answered in advance of an innovation project, both closed and open innovation practices can be selected and adjusted to accomplish your innovation objectives.

These questions are actually derived from three design principles associated with innovation: 1) architecture of participation;¹ 2) minimum efficient scale; and 3) value extraction and control.

  Closed innovation Open innovation
Rationale
  • Exploits talent and knowledge that are known quantities.
  • Keeps competitors at bay.
  • Protects intellectual property.
  • Provides maximum control.
  • Reduces time to market.
  • Cost effectively expands an organization’s talent base.
  • Provides insight into customer attitudes, needs, and concerns.
  • Places the broadest range of ideas on the table.
  • Shares and therefore mitigates risk.
  • Provides insight into the unique features of a new product/service.
Suitability
  • Projects involving complex science or a high level of integration.
  • Projects where secrecy or protection of intellectual property is paramount.
  • Examples: New weapons systems, new drugs, infrastructure projects.
  • Projects not dependent on complex science or high levels of integration.
  • Projects that involve products that are small scale, more open, and more modular.
  • Projects where secrecy and/or intellectual property are not issues.
  • Examples: consumer products, movies, music.

Architecture of participation Basically, this is a set of rules governing who can participate in a system (in this case, an innovation initiative) and in what capacity. The higher the level of participation, the more open the approach to innovation. Not limited to innovation, the concept has broad application. For example, the classified ads section of a newspaper has a very clear architecture of participation. While within certain bounds customers have control of content, the newspaper can exclude inappropriate content and controls the format. Products like Internet music and movie services also invite participation, but there are rules. Depending on your product or service, market-based innovation always involves an architecture of participation. It is one way of determining how open or closed your approach to innovation can or should be.

Innovation is almost never an either/or choice. As most companies have discovered, their innovation goals involve a complex mix of closed and open innovation that is uniquely tailored to their innovation objectives.

Minimum efficient scale Minimum efficient scale involves the lowest cost at which a product or service can be produced and helps determine how competitive the product or service will be in a given market. This impacts the innovation investment and how open or closed the innovation initiative will be. For example, if the innovation is likely to involve millions of dollars and result in an innovative product in a market with a large number of competitors, the approach is likely to be more closed than open.

The idea of minimum efficient scale can be related to many things, and in particular R&D. So, for example, when the CAT scanner was first invented, a huge amount of R&D investment was needed to get the first one out the door. Some sharing of risk occurred, but the innovation process was open only in a limited sense. The same is true with, for instance, drug development, where there is sometimes limited sharing but gated openness at best.²

Scale also comes into play when the cost of creation runs high. Companies like Intel, for instance, spend millions creating new chip plants, so some sharing is bound to occur. However, such companies are not in the business of sharing their vast process and manufacturing knowledge in any truly open way.

Value extraction and control Innovation is, ultimately, about value. Depending on the product or service, value can flow to a number of constituents, including creators, investors, platform hosts, participants, users, and customers. The direction of that flow determines how open or closed the approach to innovation will be. For example, if the innovation involves an open-source software product dependent on collaboration for development, the approach will be very open and all of the value will go to consumer surplus (what’s left when value produced exceeds consumer cost). If, however, the innovation involves a service that solicits customer ideas that are then approved and distributed, then the value derived is more dispersed and the approach is likely to be more of a balance between open and closed.

The bottom line is that while in theory it’s easy to silo approaches to innovation, in reality innovation is a complex dance with many steps and rhythms that intersect and interplay as the process moves forward. Deciding how to use the optimal blend of open and closed systems to invite participation and innovation while maximizing economic value is the job of the highest levels of leadership. In any organization, understanding this is essential if meaningful innovation is to take place.


1 This term is used by computer book publisher Tim O’Reilly “to describe the nature of systems that are designed for user contribution.” See his article, “The Architecture of Participation,” June 2004 at http://oreilly.com/lpt/a/5994.

2 However, evidence is beginning to emerge that suggests pharmaceutical companies are moving to more open structures because their closed structures have failed them. See, for example, “What does open innovation mean to pharmaceutical R&D and how can it be realized?” at http://www.paconsulting.com/our-thinking/what-does-open-innovation-mean-to-pharmaceutical-research-and-development-and-how-can-it-be-realised/.