Open vs. Closed Innovation Models and Business Sustainability

Introduction to Open and Closed Innovation

Following the introduction of the concept of open innovation, exploration in the area has increased significantly. Open innovation involves the utilization of purposive knowledge inflows and outflows to help accelerate internal innovation and expand external markets for innovation. Closed innovation, on the other hand, 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

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 grounded on continuous education and learning for all participating parties. The evolution and constant changes in the micro and macro environment produce products, processes, and innovation (Marques, 2014). There was a 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 forms of innovation are contingent and do not consist of merely a simple change from closed to open innovation, as has been suggested by various sections of the literature. Research indicates that innovation patterns 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 favoured innovation approaches that kept all innovations firmly under the control of the firm. The open model is a 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 rising popularity of open innovation among both SMEs and large firms (Brunswicker & Ehrenmann, 2013).

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

Organization Requirements to Handle Open Innovation

In order to maximize the advantages of open innovation, human resources need to adopt a new paradigm and change the way they deal with technologies, knowledge, and ideas. As suggested by research activities that have contributed to the study of open innovation, organizational culture also needs to become 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 growing significance of open innovation, many organizations face considerable 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. 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, transform, and eventually capitalize on innovation inputs. Formal metrics and procedures for measuring and evaluating innovation performance — from inception through to commercialization — are also very important. There is a need for a high level of discipline among SMEs towards the innovation value chain so that internal and external innovation can be integrated successfully. However, creating value from openness and efficiency in the management of innovations is not always enough. There should also be strategic coordination, a supportive culture, and adequate financial support (Brunswicker & Ehrenmann, 2013).

Making the shift to open innovation will require firms to introduce new managerial structures and practices pertaining to the way open innovation is executed. Anecdotal case studies on organizations evolving from closed to open innovation show that such organizations developed new managerial capabilities at various levels. Establishing these 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 into developing structures and practices that allow for effective execution of open innovation (Brunswicker & Ehrenmann, 2013).

Open Innovation Model for SMEs

Generally, SMEs do not have both the technical and managerial skills needed to ensure effectiveness at a high level. Their efforts at open innovation are limited by factors such as strategy and culture. An OECD study revealed that just 5–20% of SMEs are actively utilizing an open innovation approach. A number of scholars have argued that SMEs can benefit more from open innovation, and on a larger scale, than bigger firms, since large 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, allowing them to compete effectively with bigger firms (Hossain, 2015).

Collaboration

SMEs regularly collaborate to make the process of achieving common goals easier. Both collaborating firms should be able to derive value from the alliance. Taking advantage of open innovation during business collaborations therefore goes beyond technology innovations themselves and encompasses value chain collaborations and partnerships that explore fresh knowledge areas that can be readily adopted by the organizations. While the innovation stage is important, SMEs have found that the most significant stage at which to collaborate is during commercialization. Firm size is connected with the extent of collaboration: studies reveal that smaller SMEs tend to collaborate less than relatively larger SMEs (Hossain, 2015).

Dynamic Capabilities

SMEs benefit a great deal from labor-intensive, knowledge-based, and dynamic industries, but they often lack the internal capabilities to prosper in capital-intensive mature industries. Horizontal and vertical cooperation with customers, various agencies, and suppliers plays a bigger role in innovation among SMEs than does 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).

Patenting

Patenting helps SMEs in various ways, including 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 significant challenge. SMEs have focused portfolios, limited finances, and specialized knowledge, all of which can hamper innovation. Because they may not have adequate funds to prevent other companies from appropriating their innovations or executing on them faster, 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 open innovation (Hossain, 2015).

Networking

Networking is an effective way to create an environment conducive to innovation among SMEs. Innovative SMEs tend to maintain networks with various institutions and other SMEs both within and outside their sector. To ensure open innovation, SMEs should pay attention to both the informal and formal relationships they maintain with various groups and organizations (Hossain, 2015).

Open innovation is necessary for SMEs to grow steadily, especially in technology-intensive sectors. 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 single firm can have all the technology solutions needed to run a successful operation. Networking and collaboration are therefore essential, as SMEs depend heavily on partners' resources to help them develop and implement strategies.

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