Innovation models and their role in sustainable business development

¶ … Innovation Models Lead to a Sustainable Business -- Closed vs. Open Innovation

Following the introduction of the concept of open innovation, the exploration in the area has increased significantly. Open innovation involves the utilization of purposive knowledge inflows and outflows to help in the acceleration of internal innovation and the expansion of external markets for innovation. On the other hand, closed innovation refers to a situation where every activity is carried out within the organization and for the benefit of the organization. There are strong arguments for both approaches.

The Shift from Closed to Open

Innovation previously adopted a linear view where the focus was on science and tended to favour 'closed' systems. This approach would later be replaced by a more interactive and 'open' model that was grounded on continuous education and learning for all participating parties. The evolution and constant changes in the micro and macro environment produces products and processes as well as innovation (Marques, 2014). There was need to adopt a more nuanced approach that focused on the immediate needs of managers, the comparative choices they had when making decisions and an emphasis on an open model rather than a closed model (Felin & Zenger, 2014). Those who push for open innovation tend to lean towards universal prescriptions and proposals while research shows that the mechanisms open innovation employs and the results it achieves are always highly sensitive to contingency and context. This is not unexpected, as history shows that both closed and open natures of innovation are contingent and do not consist of merely a simple change from closed innovation to open innovation as has been suggested by various sections of literature. Research indicates that innovation patters vary fundamentally -- by firm, strategy and sector. It is therefore essential to look at the mechanisms that aid the generation of successful innovations in both closed and open systems (Tidd, 2013).

Traditionally, established organizations relied heavily on their Research and Development departments and were in favour of innovation approach that protected all innovations firmly under the control of the firm. The open model is new way of thinking and drives new paradigms on how organizations can benefit from innovation. As opposed to closed innovation, firms are actively encouraged to utilize knowledge outflows and inflows to speed up internal innovation and to expand their market territories. This reality has led to the rise in popularity of the concept of open innovation with both SMEs and large firms (Brunswicker & Ehrenmann, 2013).

One of the reasons for the rising popularity of open innovation is because it fits well with the tendency of firms today to work outside of their traditional operational boundaries. Much of the research in the area have been directed at manufacturing organizations and very little attention has been given to service businesses in spite of the big portion of the economy they control. An analysis of UK companies reveals the following. The use of innovation by firms tends to increase with increase in the size of the firm and the size of their R&D department. Service businesses tend to 'open' innovate more than their manufacturing counterparts and they place more emphasis on technical and scientific knowledge than they do so on market knowledge. Open innovation has also been linked to the uptake of service inclusive business models among manufacturing firms (Mina, et al., 2014).

Open Innovation and Sustainability

Research on open innovation shows that benefits organizations accrue from adopting strategies of open innovation vary. Nonetheless, it is not yet clear why this is the case. A possible reason is that business models of companies are not specifically in tune with open strategies (Saebi & Foss, 2015). The concepts of business models and business model innovation find their grounding in strategic management, industrial economics, and corporate practice. Nonetheless, business models do not constitute a strategy but are the core drivers of strategy and play a role in understanding and decoding as well as effectively communicating what a strategy is all about within the organization's internal and external environment (Sindakis, et al., 2015).

Organizations do not exist in a vacuum and must continually look for new and useful ideas from the external environment. The concept of open innovation allows organizations to do this in a structured manner and so ensure sustainability.. Indeed designers are adopting a concept known as Lean User Experience (Lean UX), which recognizes that customer archetypes are just hypotheses and not facts. Until proven true, customer profiles are to be treated as provisional (Ries, 2011). What innovation implies remains to be comprehensively defined. Furthermore, there is great overlap between the concept of open innovation and other concepts such as crowdsourcing, user generation and distributed innovation. While the body of research on open innovation has grown significantly in the recent past, still many contextual issues have not been addressed. Most of the studies have been carried out in the context of developed nations and in large organizations. Open innovation in the developing world and SMEs has still not been adequately studied. Open innovation in SMEs is just starting to gain ground and it is important that managerial issues such as capacity development need to be studied in this context. This is in appreciation of the fact that developing strong internal capabilities is one of the best ways to build a sustainable organization (Hossain, 2013).

Organization Requirements to Handle Open Innovation

In order to maximise the advantages of open innovation, human resource needs to adopt a new paradigm and change the way they deal with technologies, knowledge and ideas. As suggested by research activities that have and continue to contribute to the study of open innovation, organizational culture also needs to be more open to the concept (Herzog & Leker, 2011).

New challenges to management are arising due to increased engagement and openness as well as due to the increase in interactions between organizations. In spite of the increase in significance, many organizations face many challenges in actively managing open innovation processes. Research on large firms reveals that they require internal capabilities that allow them to absorb external knowledge and ideas and derive value from them. Established managerial attitudes and practices on innovation influence how an organization absorbs external ideas and knowledge in a big way. It has been shown that both informal and formal managerial practices are significant in capturing value from openness in small and medium-sized enterprises as innovation represents an organization's ability to search and transform and eventually capitalize on inputs of innovation. Further, formal metrics and procedures for measuring and evaluating innovation performance through the processes of inception all the way to commercialization are very important. Indeed, there is need for high level of discipline among SMEs towards the innovation value chain so that internal and external innovation is integrated successfully. However, creating value from openness and efficiency in the management of innovations is not always enough. There should be strategic coordination, a friendly culture, and adequate financial support (Brunwicker & Ehrenmann, 2013).

Making the shift to open innovation will require firms to induce new managerial structures and practices as pertains to the way open innovation is to be executed. Anecdotal case studies on organizations evolving from closed to open innovation show that such organizations imbibed new managerial capabilities at various managerial levels. Establishing the new capabilities will require firms to undergo organizational change encompassing different phases. However, not much work has been done to understand organizational change in small and medium sized enterprises. Firms should therefore put more effort in developing structures and practices that can allow for effective execution of open innovation (Brunswicker & Ehrenmann, 2013).

Challenges in Open Innovation

While open innovation is considered a huge success is academic circles, very few business organizations have followed suit, and some players think it has a lot of imperfections. The reasons some organizations view open innovation as limiting include (Marques, 2014):

i. It appears to adopt a linear model par excellence which basically consists of variations of 'stage-gate' model, with a funnel that allows exchange of ideas throughout the whole linear process.

ii. Knowledge flight is another problem. The view of open innovation is in favour of information sharing but this reality can lead to both flight of sensitive technological and commercial knowledge. There is need for balance to be found between knowledge exchange and control of sensitive knowledge.

iii. The other issue has to do with opening knowledge pathways and taking lessons from the global economy, a reality that led organizations like Philips and Proctor & Gamble to find internal frontiers that limit free information flow between departments. If this is the case then the model certainly has unexplained problems.

iv. Another problem is about the huge influence customers and the market has on innovation sources. There are several factors that have to be considered when talking about process, market, process and organizational innovation.

Adopting Open Innovation

Firms are now joining forces in sophisticated regional innovation networks or spinoff/start-up ecosystems where that encourage open innovation efforts. Open business models and open innovation are concepts that are quickly gaining ground in the new environment (Chesbrough, 2003). Closed innovation practices are quickly becoming obsolete. Companies adopting open innovation have taken a sequential approach starting with customer involvement, followed by employee involvement, external networking and then more sophisticated practices such as R&D outsourcing, external participations, venturing and IP licensing. Most traditional arrangements had smaller organizations do research and development for bigger organizations or transfer their innovative breakthroughs to them. Nonetheless, interactions of firms now are being changed by open innovation. The initial phases of R&D has open innovation offering neutral platforms for organizations to investigate emerging and new applications and technologies through joint effort and also share the costs and risks involved. Open innovation is opening new pathways for organizations of various sizes to interact and collaborate. This reality has led to bigger opportunities for less-capitalized or smaller organizations and companies (Segers, 2015).

Open Innovation Model for SMEs

Generally, SMEs do not have both technical and managerial skills to ensure effectiveness at a high level. Their efforts at open innovation are limited because of factors such as strategy and culture. OECD did a study that revealed that just 5 -- 20% of SMEs are actively utilizing open innovation approach. A number of scholars have argued that SMEs can benefit more from open innovation and in a larger scale than bigger firms since big firms are often impeded by bureaucracy and lack of agility. Smaller firms are more likely to take risks and are better positioned to decide and execute faster on ideas that come to their table. Open innovation can remedy SMEs' disadvantaged position brought about by inferior technical and managerial skills and so allow them to compete effectively with bigger firms (Hossain, 2015).

i. Collaboration

SMEs always collaborate to make the process of achieving common goals easier. The two collaborating firms should be able to derive value from the alliance.. Taking advantage of open innovation during business collaborations is therefore bigger than the technology innovations themselves and encompass value chain collaborations and partnerships that explore fresh knowledge areas that can be easily adopted by the organizations. While the innovation stage is important, SMEs have found that the most significant stage to collaborate in is during the process of commercialization.. Firm size is connected with extent of collaboration. For instance, studies reveal that smaller SMEs tend to do less collaboration than relatively bigger SMEs (Hossain, 2015).

ii. Dynamic Capabilities

SMEs benefit a great deal from labor-intensive, knowledge-based and dynamic industries but they don't have the internal capabilities to prosper in capital-intensive mature industries. The horizontal and vertical cooperation with customers, various agencies and suppliers plays a big role in innovation in SMEs than is the case among similar cooperation among academic institutions, state agencies and research institutions. This is because the active players in the market tend to have more useful and actionable information than outsiders. (Hossain, 2015).

iii. Patenting

Patenting helps SMEs in various ways like the ability to license their innovations and knowledge to other parties. Recognizing opportunities in a timely manner to out-license the technologies of a firm outside of its core operations can be a big challenge. SMEs have focused portfolio, limited finance and specialized knowledge and this can hamper innovation. Because they may not have adequate funds to fend off other companies from stealing their innovations or executing on them faster than they do, they need to use intellectual protection strategies such as patenting. Patenting is therefore a key strategy that can be employed by SMEs seeking to capitalize on innovation (Hossain, 2015).

iv. Networking

Networking is a good way to create an environment that is conducive for innovation among SMEs. Innovative SMEs tend to have networks with various institutions and SMEs in their sector and outside their sector. To ensure open innovation, SMEs should pay attention to both informal and formal relationships they have with various groups and organizations (Hossain, 2015).

Open innovation is necessary for SMEs to grow steadily especially in those sectors that are technology-intensive. To remain competitive, they must continually develop technologies that allow them to offset the competitive advantages that bigger firms enjoy due to economies of scale. The nature of technology-intensive industries is such that no one particular firm can have all the technology solutions to run a successful operation. Networking and collaboration is therefore necessary as SMEs depend heavily on resources of partners to help them develop and implement strategies..

Innovation and Sustainability

Sustainability innovations are systemic and require several organizations to operate in a consistent manner. Open innovation is a way of thinking that also concerns itself with shared value creation, improved well-being of humans and sustainable prosperity. Many players appreciate that innovation does more than aid social and economic progress. It consists of mindsets, skill, art and societal capabilities that form the foundation of progress and survival of humans. It is therefore important that open innovation aim to enhance the creation of value for civilians, businesses, academia and the government simultaneously. Open innovation is enhanced by the interaction of three big trends -- mass collaboration, sustainability and digitization. Across the globe, Moore's law is traversing almost every field. Industries that took decades to come of age now reshape themselves in just a few years. This has been the case with the effect of digitization on music and books. Several other industries are ready and are positioning themselves for this rapid transformation. With the evolution of open innovation, the goal will also develop to help players in industry and in academia get results in a profitable, predictable and probable manner. Open innovation in the real world will increase the success rate and velocity of open innovation as it is experimental and co-creative. Co-creation and the creation of a lot of value by several organizations in a given industry reduce systemic risk and so ensures a stable and sustainable industry (Curley & Salmen, 2013).

Open Innovation as a Business Strategy

Organizations can derive tremendous commercial value from open innovation. It is however necessary that more research be done on how firms can explore the various economic potential of open innovation. Research that has been done on getting innovations has covered such areas as searching, filtering, acquiring and enabling -- with each category having its specific sets of conditions and mechanisms. The studies on integration of innovations have mostly taken the perspective of absorptive capacity and not a lot of attention is given to the place of culture and competencies. The commercialization of innovations emphasizes the way external innovations produce value instead of the way organizations derive value from innovations. Finally, the stage of interaction considers factors in both feedbacks to aid the linear process and also reciprocal innovation activities and processes like co-creation, community innovation and network collaboration. Looking at 291 publications on open innovation shows that most of them do indeed address the elements of inbound open innovation process model. In particular, it is revealed that researchers have mainly focused their examination of the leveraging process, focusing deeply on external sources of innovation. The gaps in research, if addressed, can lead to new opportunities on how to deploy open innovation as an emerging business strategy (West & Bogers, 2013).

This review and synthesis appreciates that gaps existed in previous research. One of the gaps was the inclination to ignore the significance of business models in spite of the key role they play in differentiating open innovation from earlier works that had been done on inter-organizational collaboration as pertains to innovation. One other gap is the tendency of open innovation to use the term 'innovation' in a manner not consistent with how innovation management had previously defined it (West & Bogers, 2013).

Open Innovation as a Business Model

Even though researchers have advanced significantly in their understanding of the consequences and determinants of innovation, it is not until recently that they started to focus on the way innovation works as an economic process (Arora, et al., 2004). The expanding academic interest globally on open innovation shows that organizations are increasingly interested in investigating new practices, models, tools and approaches. Nonetheless, the published articles on open innovation still have unsolved questions. Two dominant concerns need to be addressed. First, businesses need to fully understand how important open innovation is in high tech industries. Second, further studies should be done to refine the knowledge and techniques available on how companies can put innovation into practice. (Ahara, et al., 2015).

There are very few articles that explore the association between business models and open innovation and how they affect value creation. There is a need to ascertain whether external and internal knowledge and partnerships developed from open innovation and business models can contribute to value creation. Future research looking into the area might shed light on this concern and inform the direction open innovation takes (Aranha, et al., 20150.

When one thinks about innovation, they should first look into 'Post-Industrial Society' scenario. The term was coined by one Alain Touraine (1997) and is defined by a situation where predominantly industrial economy is replaced with a predominantly service economy. Touraine was one of the first though leaders to critically look into social change, economic liberalism, capital internalization and privatization processes. Open innovation is a concept that arose in the post-contemporary and post-modern context and is fast gaining ground nationally and globally, especially when the topic of value creation is being discussed. Value creation and delivery through open innovation has become the norm in the current business environment and is mainly driven by rate of change and complexity. The current complexities and fast rates of change require companies to develop the capability to integrate, re-configure their operations and respond fast to market changes (Aranha, et al., 2015).