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Open Innovation vs Closed Innovation as a Business Strategy

Innovation is not a choice. It’s a necessity. In order to not just survive, but thrive, companies need to adapt and continuously innovate to develop new sources of competitive advantage. Andy Grove, CEO, Intel Corporation, says of innovation in his book “Only the Paranoid Survive”:

“Strategic inflection points offer promises as well as threats. It is at such times of fundamental change that the cliché ‘adapt or die’ takes on its true meaning”

Companies are rapidly realizing that the products and services that form their core business today might not be relevant tomorrow. Businesses today increasingly recognize the importance of generating new ideas and harnessing their resources to drive these innovations to the market. Whether one finds internal sources of innovation or external via start-ups or technological partners, businesses need to market these ideas quickly to leverage strategic advantage.

Traditionally, large companies across the globe adopted a closed innovation model, often accompanied by large R&D expenditure. However, today with the growth of global connectivity and outreach, corporations are also looking to harness the global community and are opening up to sourcing innovative ideas from external sources. This has worked well especially for situations where companies lacked the required talent in house. Collaborating with external partners or sources for their development needs gives them a competitive advantage, and enables a shorter time to market.

Why Open Innovation Matters?

Businesses are rapidly exploring new avenues in the search for revolutionary ideas. Sometimes, it is not because their internal R&D capabilities are weak, but because they are assured that tackling a problem from different perspectives may yield better results.

Take for example the contest Netflix, the leading online-DVD rental service, ran to get new ideas for better DVD recommendations to its customers. They offered a prize of $1 million to the team that would develop the best video-recommendation algorithm. The contest attracted several innovators, who came up with a range of solutions. Within a week Netflix had three teams beat the company’s old algorithm.

So, what worked for Netflix? By taking the open innovation approach, the company opened up multiple avenues for ideas instead of relying on one single source. This simple approach proved significantly more cost effective and timely than spending years in internal R&D.

Similarly, software companies are also increasingly developing open-source platforms through a distributed co-creation, thereby synergizing their capabilities. For example, the “LAMP” stack, developed together by Linux, Apache, MySQL and PHP/Perl/Python, has become an integral component of today’s IT infrastructure.

Open Innovation vs Closed Innovation

With the product shelf-life shrinking, companies need to transform new ideas into marketable products or services faster than ever before. Open innovation techniques help businesses collaborate with other companies, get better business insights and leverage the required expertise, usually at lower costs. On the other hand, following a closed innovation approach in such situations would invariably involve large infrastructure expenditure and talent development within the firm, which may or may not yield the expected results.

Rogier van der Heide, the Chief Design Officer of Philips Lighting, in his epic speech on open innovation aptly said,

“Innovation doesn’t happen in a vacuum. You’re never alone. No one has the key just by himself.”

Industry giants like Apple, HP and IBM have not only realized the importance of open innovation but have also taken steps towards adopting it. With benefits like reduced R&D costs and increased productivity, CEOs are focusing on synergizing internal and external innovations for long-term growth.

It comes as no surprise then that the closed innovation approach is slowly losing favor. It advocates a highly controlled environment in the new product development cycle, whether the ideating, producing, marketing or financing phases. Closed innovation often restricts strategists as they end up waiting for viable solutions, leaving them with little time left for effective product launch and marketing efforts.

If skilled resources are available outside the company in the form of capable suppliers and partners there is no real reason a business choose to depend only on internal innovations. Why not rather include open-innovation at the core of the business strategy and leverage its numerous benefits?

Strengthen Your Business Strategy

While innovation is necessary to survive and succeed, often decision makers are faced with the questions – “Where do we find the resources to innovate? How innovation can create a competitive advantage for the business?” Well, the answer lies in the fact that by combining internal sources of innovation with external ones, one can maximize returns and truly make innovations work for the business. The quicker one realizes and adopts it, the faster you can innovate and re-write the business growth story!

 

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