Open Innovation vs Closed Innovation: Beginner’s Guide12 min read

Open Innovation vs Closed Innovation: Beginner’s Guide

Nowadays, innovation has become a key driver of success. Failing to innovate can put companies at risk of lagging behind their competitors and experiencing a decline in their market share.

But, when it comes to innovation, companies can take two different approaches: open innovation and closed innovation. What are the differences between the two? And which type of innovation is right for you?

In this blog, we will explore the differences between open and closed innovation.

Let’s start.

What is open innovation?

Open innovation is a concept that emphasizes the importance of collaboration and external partnerships in the innovation process.

Rather than relying solely on internal resources, companies that embrace open innovation actively seek out and engage with various external stakeholders and sources, including customers, suppliers, academic institutions, and other companies.

This approach acknowledges that the most innovative ideas may not necessarily originate from within a single organization and that a more diverse and open approach to innovation can result in more successful outcomes.

What is open innovation for?

In an open innovation strategy, you give weight to both internal and external ideas. You create an ecosystem that extends beyond the boundaries of your company and that is characterized by your willingness to share ideas and knowledge with others.

Ultimately, the goal of open innovation is to create a culture of continuous innovation that is not limited by the resources or expertise of a single organization.

By embracing external knowledge, skills, and competencies, you can tap into a broader range of perspectives and ideas. And essentially, drive more successful outcomes.

What are the advantages of open innovation?

Open innovation allows you to take advantage of five benefits. With open innovation, you can:

1. Tap into skilled individuals

Open innovation processes enable you to tap into external networks, communities, and organizations to access fresh talent, new ideas, and innovative solutions. This concept is based on the premise that the best ideas can come from anywhere.

By collaborating with external partners in creating fundamental technological improvements and other forms of innovation, you can tap into a wider pool of knowledge and expertise to drive successful outcomes.

This approach involves sharing internal talents, skills, and expertise with external partners, thereby fostering a culture of collaboration and knowledge sharing.

2. Leverage additional resources other than stable internal innovation structures

Sometimes, you need to leverage a range of resources beyond your internal innovation structures to achieve innovation goals. This process may involve establishing partnerships with external entities, such as larger companies or universities.

By building relationships with external partners, you can access specialized knowledge, research facilities, and funding opportunities, among others, which can help accelerate your innovation process and bring products to market more efficiently.

3. Generate other sources of revenue

An innovative company that includes open innovation management strategies may take internal ideas or projects that may not necessarily align with its core business model and develop them externally, resulting in newly opened revenue opportunities.

In-house innovations aside, establishments that thrive in an innovative environment collaborate with external partners — including startups, research institutions, and other organizations — in developing new products, services, and business models.

This approach not only helps drive innovation within the organization. It also creates opportunities for commercialization and revenue generation.

4. Co-create

Co-creation is a powerful approach to innovation that involves engaging customers and other stakeholders in the product or service development process.

By involving these people in the ideas stage of product or service development, you can:

  • Go beyond your defined company boundaries
  • Momentarily forget your own innovation processes, and
  • Tap into a wider range of perspectives and insights that will ultimately lead to more innovative and customer-centric solutions

The co-creation process involves building a community of customers and other stakeholders passionate about the company’s products or services.

Unlike a closed innovation process, this community can provide valuable feedback and insights throughout the innovation process, from ideation to product launch.

5. Speed up timelines, reduce costs, and minimize risks

Open innovative companies are more likely to develop promising innovative products. When they utilize a partnering company’s innovative structure in addition to theirs, they automatically welcome reduced costs, shared risks, and faster timescales.

Smaller companies can access resources and expertise they may not have had otherwise, while larger companies can benefit from external partners’ innovative ideas and specialized knowledge.

These things speed up the innovation process, leading to products and services being brought to market more quickly and efficiently.

What are the challenges of open innovation?

Open innovation comes with three major challenges:

  1. Strategic
  2. Operational
  3. Cultural

Strategic challenges

Without a clear goal or purpose, companies may struggle to effectively utilize external resources and networks, wasting time and resources.

Companies should clearly understand what they want to achieve through their innovation efforts and how going beyond clearly defined company boundaries can help them achieve it.

This way, they can effectively identify the right partners to collaborate with, define the project’s scope, and allocate the necessary resources and budget to achieve the desired outcomes.

Operational challenges

If you were to opt out of your self-contained innovative environment, you would utilize external knowledge and talents and assign concepts and responsibilities to everyone involved in the process to ensure optimal resource utilization.

This includes creating plans for concepts that may not be used immediately. Once the ideas have been developed, the open innovation process consists of scouting, idea evaluation, and financial valuation.

While many organizations currently only outsource the scouting process, it is ideal to outsource all three phases to a third-party expert, such as a research firm, to eliminate bias or prejudice.

Finally, building a streamlined process is critical for implementing open innovation successfully. This means creating a system for managing ideas, assigning roles and responsibilities, and tracking progress throughout the process.

By developing a clear plan for open innovation and implementing a streamlined process, you can increase their chances of success and gain a competitive advantage in your industry.

Cultural challenges.

To effectively implement open innovation, it’s crucial for your organization to establish an innovation culture that fosters creativity and embraces change.

This culture should prioritize clear communication and collaboration between teams, as well as a commitment to seeing innovation projects through to completion.

By cultivating an environment that encourages innovation, your employees are more likely to contribute their ideas and expertise, and the organization can leverage its internal resources to drive successful outcomes.

What is closed innovation?

In contrast to open innovation, a closed innovation model refers to an innovation process that takes place entirely within the confines of a single organization’s internal structure, without involving external networks or resources.

This self-contained company environment involves conducting all aspects of innovation, from research and development to implementation, within the organization’s internal walls.

However, the extent to which innovation can be completely closed even within a single company can vary, as some organizations may choose to collaborate with other teams or departments within the company to generate new ideas and share resources.

Overall, the closed innovation approach is based on the premise that all resources—including intellectual property, sales channels, and venture capital necessary for innovation projects— are all available within the company.

In closed innovation models, the usual goal is to maximize organizational innovation’s ongoing process and internal efficiency.

What are the advantages of closed innovation?

Closed innovation has three advantages:

1. Exclusivity

In a closed innovation model, all innovation activities are kept within the confines of a single company, under the control of top management.

This means that every aspect of innovation, from research and development to implementation, is conducted in-house, without external collaboration or input.

However, this approach can limit the resources and perspectives available for innovation, potentially hindering the company’s ability to develop truly groundbreaking products or services.

2. Uniqueness

Closed innovation fosters uniqueness by keeping all innovative developments within the company without sharing them with the outside world.

This approach results in additional competitive advantages as it allows for the creation of unique technologies that are not yet available on the market.

By maintaining full control over all aspects of the innovation process, companies can develop and protect their proprietary technology, giving them an edge over their competitors.

3. Reduction of project leakage to the market

In a closed innovation system, all innovation-related activities are conducted within the organization, and there is limited external involvement.

This allows the organization to keep its intellectual property and innovation initiatives confidential, limiting the risk of competitors copying or replicating their innovation efforts.

The closed innovation system helps prevent leaks of sensitive information that may include new product development, cutting-edge technologies, and confidential customer data.

This is particularly relevant in industries where secrecy is crucial to remain competitive, such as defence, aerospace, and pharmaceuticals.

What are the challenges of closed innovation?

Applying closed innovation comes with three challenges:

  • Lack of other perspectives. Without other perspectives, a department’s employees, no matter how talented, may be unable to consistently generate fresh ideas.
  • Lack of resources. Technologies in this innovation model are developed with limited resources available within the corporation, which can limit the scope and pace of the innovation process.
  • Increased risk of failure. The corporation lacks the benefit of external expertise, which is often instrumental in refining ideas and products before they are introduced to the market. With closed innovation, all development work is performed in-house, which limits the company’s exposure to outside perspectives and feedback.

Decide which is better for your business: open or closed innovation?

Whichever approach your business decides to use, one of the most effective ways to manage and streamline the process is with an innovation management platform. Download our innovation ebook here to learn more.

Published On: March 2nd, 2023Categories: Innovation strategy

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