Looking at Closed versus Open Innovation

Is there any word more fundamental to the modern business lexicon than ‘innovation’? To say that it forms an important part of enterprise is probably an understatement. If we take renowned researcher John Seeley Brown’s definition, the very nature of doing business is an act of innovation: that is, innovation is invention — of any form—implemented and taken to market. It’s certainly a concept we like to mull over at IN-PART (it’s what the ‘in’ stands for) and one which, over the coming months, we’ll be examining in some detail. In this, the first of a new series of editorial features, we’ll be exploring some of the big ideas behind the structure of innovation, their influence on world-leading innovators, and how they could help you and your business.

It was almost fifteen years ago that Henry Chesbrough, organisational theorist, professor and author, launched his influential book, ‘Open Innovation,’ characterising new approaches to R&D and coining the phrase in the process. Presented as a dichotomy of the new versus the old, Chesbrough categorised  ‘closed innovation’ as the outmoded 20th-century strategy for bringing inventions to market. As a list of ill-advised attitudes to R&D management, his six principles of closed innovation are worth revisiting:

1. The brightest minds in our sector work for us.
2. Successful R&D demands that we discover, develop, produce, and deliver ideas to market in-house.
3. Discovering an idea is the surest way to get it to market first.
4. If we get to market first, we can control the market.
5. If we have the most and best ideas, we will control the market.
6. Strict control of our IP is essential to prevent competitors from profiting from our ideas.

These principles were associated with giant, inward-looking companies monopolising their sector, investing heavily in internal research—presenting a significant barrier to entry for would-be start-ups—and then reaping the rewards in terms of market share. At the core of the closed innovation model is the strict control of ideas, which are never allowed to originate outside of or leave the firm.

This strategy was not without success. The legendary Bell Labs invented, among many other products, the laser and the transistor in closed purpose-built facilities. DuPont’s centralised research programmes yielded numerous chemical discoveries, including Kevlar and nylon. The problems came for closed research when, according to Chesbrough, three factors started to influence the market:

• An ever-increasing number of university graduates with specialist degrees; a much greater pool of expertise than any single firm could hope to claim for themselves.
• The economic mobility of company employees. Workers were not necessarily bound to one employer or location, and neither were their innovative ideas.
• A growing pool of venture capital, reducing the barriers to entry in many sectors.

But just how accurate was the closed innovation model?

A 2009 analysis in the International Journal of Innovation Management, concluded that much of the closed innovation paradigm may have been overstated and probably a few decades out of date. Far from believing they held a monopoly of knowledge, the study showed that 20th-century firms were very much aware of external expertise.

The UK chemical industry, for example, knew of and revered German expertise in their sector as far back as the 1910s. In 1969, civil aviation was transformed through a strategic alliance led by Airbus, beginning as a joint venture between German MBB, the French company Aerospatiale, and joined later by the Spanish CASA and British Aerospace in the 90’s. JVC’s victory in the fabled VCR battle with Sony hinged on the former’s licensing deals with rival manufacturers, guaranteeing a more widely playable format.

By the time Chesbrough’s book was published in 2003, many of the closed paradigm principles would have been relegated to history. Nevertheless, his open model follows as the antithesis and an undeniable improvement. His conditions for ‘open innovation’, now well established, are as follows:

1b.  Valuable knowledge and expertise transcend any single firm.
2b.  External ideas can complement internal ones and be just as profitable.
3b.  External ideas may fit one business model better than that of the originator.
4b.  Having a strong business model is more advantageous than getting to market first.
5b.  Capitalising on external and internal ideas will yield greater market share.
6b.  IP should flow into and out of a firm according to the needs of each business model.

The ideals of open innovation come hand in hand with a radically different vision of the marketplace. One in which start-ups and new businesses have just as much significance for technological change as the establishment players. Where universities and customers alike contribute their knowledge and ideas, and projects flow seamlessly between companies in licensing deals, buy-outs and joint ventures. It’s certainly an appealing prospect.

More than a decade since these ideas were consolidated, is Chesbrough’s vision of open innovation any closer to reality?

A survey conducted by the Boston Consulting Group last year found that 78% of respondents (leading figures at some of the world’s most innovative companies) claimed to find most new projects and ideas internally. Controlled IP is still the backbone of companies large and small; Apple and Google, two of the biggest innovators out there by any measure, still produce and control tight clusters of patents from within their ranks. Companies who might be relatively open on some fronts, like IBM in their support for open-source software, can be strictly closed on others, such as hardware development.

And we are beginning to see a return to the trend that the largest and most disruptive companies can attract the very best candidates in an increasingly specialised job market. Yet, in other industries, the tide is turning rapidly. Big pharma has jealously guarded drug patents for decades, securing large, reliable revenue streams for the IP holders. Reliable, that is, until those patents come to expire.

In 2012, AstraZeneca faced a so-called “patent cliff”, an industry red-alert which saw a string of their most popular drug products on the brink of IP expiry. With their new product pipeline running dry, the entire innovation model needed an overhaul. The solution? Under radical new leadership, their medicines division closed many of their own research sites, reduced their focus to a handful of particular diseases, and fundamentally re-structured their research pipeline. Astra now openly shares its early-stage research with a collaborative network of health charities, academics and even industry rivals. Far from being the exception, they were actually one of the last players in the industry to convert to a more open model of innovation.

Since the turn of the millennium, some sectors have been quick to transform their methods and means of innovation while others have remained steadfast. We are not yet in an era of complete openness and cooperation, but nor are we closed to collaboration. There can be no single, all-encompassing approach for all disciplines. However, the increasing globalisation of knowledge demands and rewards companies who look beyond their walls. With world-shaping research happening across the marketplace, in academic institutions and companies alike, these are prosperous times for the exchange of ideas.

Copyrights reserved unless otherwise agreed – IN-PART Publishing 2017.

Image credits:
Figure #1: Alvaro via Unsplash
Figure #2: Krissia Cruz via Unsplash

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Josh Brown is part of the Community Engagement team at IN-PART who proactively engage R&D professionals around the world with latest innovation and expertise published by universities looking for strategic external partners. Specifically, Josh works directly with the open innovation leaders within IN-PART’s community to ensure that the collaboration opportunities published on the platform feed directly into R&D pipelines. He tweets via @IN_PART.