During the 20th century, companies achieved a competitive advantage by funding their own research laboratories. Many carried out fundamental (often undirected) research, developing new technologies from which new products, even new industries, emerged. These proprietary, even monopolistic, products generated large profit margins that funded further research.
This is known as the “closed” model of innovation. Research and development were vertically integrated into this innovation model, and the barriers to entry to the market were enormous. In the initial evolution of this model, market research played little.
The concept of closed innovation
Only a proportion of completed research projects resulted in patents, and only a fraction of these patents made it to the development stage: no marketable products were identified or capital was lacking. There were no specialists whose job it was to look at technologies and imagine products. IBM carved its initials out of a chunk of silicon at the atomic level, but at the time few, if any, realized where it would lead.
In many cases, companies have developed innovative technologies, but have failed to capitalize on them. What about Xerox? They make copiers, right? Yes, but they did more – the ‘GUI’ user interface concept was first developed in Xerox’s Palo Alto Labs. It was Apple that made it a marketable concept on its ‘Lisa’ computer. Then Microsoft’s ‘Windows’ followed in Apple’s footsteps and the rest is history, lawsuits included.
Although Apple had Steve Jobs, who was a true product visionary, a company cannot count on having one. Keeping a technology within the confines of a company limits opportunities to leverage external expertise, generate insights, and take advantage of cross-industry opportunities.
Other companies that could have used a proprietary technology through leasing would have created a win-win situation for both of them. Similarly, the company itself could have licensed technologies created by other companies.
At the end of the 20th century, many notable failures to capitalize on technology opportunities raised questions about the closed innovation model, while the business landscape was changing, with:
- More options for unused technologies.
- Greater availability of venture capital.
- Greater mobility of skilled and knowledgeable workers.
- Increased availability of highly trained outsourcing partners.
- Increased strategic market research on social, technology and lifestyle trends.
- This led to the concept of open innovation.
In this concept, the boundaries of the company are porous. Technologies not used in the company are now licensed to other companies, saving revenue and time. Importantly, the company (the owner of the technology) can capitalize on market opportunities. The internal focus is on those technologies that are useful for the company’s core business: effort and capital are not diluted.
The business model of innovation
In business, technology is only useful if it is commercialized. The ways to do this are:
- Leverage technology in existing business operations.
- Technology license to other companies.
- Launch a new company using technology.
These innovation business model options tightly combine business inputs and economic outcomes.
Rather than viewing entrepreneurs and venture capitalists as threats, technology owners can use them to test new products on the market. Optionally, they can bring the products back to the main business.
Many large companies take the path of open innovation by acquiring new companies or forming alliances; others have created their own internal business groups that drive their own innovation process.
The advantages of the open model are:
- Monetization of non-essential technologies.
- Shorter time to market for promising technologies.
- The potential of multiple markets is explored and exploited.
- Testing of alternative business models for new product / service concepts.
Clearly, it is the flexibility of the open innovation model that makes it so powerful, and it works well to negate the downsides of the closed model.