Author : Att. Önder Özden*
As the competition and information technology throughout the world increases vigorously and exponentially, many companies have been trying to innovate in products, services and business models in search of a competitive edge. Globalization is already a reality and carries at its core the principle of competitiveness among companies and maximum exploitation of the economic system. Thus, innovation becomes a means to create and maintain sustainable competitive advantages, being considered a key element of business success.
Innovation has been widely discussed in business environment because, due to speed with which business has been transformed in recent years, companies that reinvent themselves and innovate their business models are likely to be those that will sustain themselves in the market in the medium and long term. The idea about innovation is directly linked to the concept of something new, be it transformed into product or service.
Merging competitiveness and innovation themes, as well as their correlation, is not a recent study target. At the beginning of 20th century, Henry Ford has investigated the modification of production model seeking maximum system efficiency and effectiveness and successfully pushed the idea of an assembly line technology and implemented it in his factories on a wide scale. As oppose to Henry Ford, Kodak, even with all its history and technological arsenal, were unable to reconcile their innovative vein with the need for a business model re-evaluation and ended up not surviving in the market. In contrast, other companies, such as IBM, have repositioned themselves to remain competitive.
Accordingly, most of the businesses should find the suitable and effective innovation model for making a difference for the long-term business survival. Innovation models try to provide fair representation related to following factors: simplifications should make the model is easy-to-use and easy-to-understand; details should enable comparison and explanation or imitation (pragmatic tools); a model should enable measurement and provide a method for evaluating alternatives either frameworks or paradigms; assumptions of the model should be correct with calculated probabilities for given outcomes (predictive); a model provides assessments, measurements and views to help tapping the innovation opportunities; a model promotes innovative thinking and works for sustained growth; helps gaining competitive advantage, and therefore, innovation normally needs change, which is generally challenging.
If any innovation model has all or some of the aforementioned characteristics, it means that the model is strong, otherwise, it shows that the model is weak. So, success of innovation process is necessary to assure success of the innovation model.
In the above sense, Rothwell explained five generations of innovation models. Then, Marinova & Phillimore widen the typology of Rothwell and explained six generations of innovation models. These models can be ordered as (1) First generation—the black box model; (2) Second generation—linear models (including technology push and need pull); (3) Third generation—interactive models (including coupling and integrated models); (4) Fourth generation—systems models (including networks and national innovation systems); (5) Fifth generation—evolutionary models;and (6) Sixth generation—innovative milieux (Marinova & Phillimore, 2003: 45).
In recent years, however, a new wave in the models of innovation has seen to be arisen. Due to the developments in technology, changes in external environment, people moving more freely between organizations by taking their knowledge and expertise with them, the growth in the Internet and the pervasiveness of media, information becomes much more widely available than ever before. Besides, developments in the information and communication technology make it easier to collaborate or jointly innovate. Additionally, fast speed of technological developments often reduces the value of an individual IP right. Consequently, owning IP alone may not give a long term sustainable competitive advantage
To generate and capture the value of innovation, firms need to consider other elements outside the traditional concept of owning intellectual property right. To benefit from changing paradigm of innovation, firms have been invited to consider practicing open innovation. Thus, open innovation came into the scene and is considered as the last (7th) generation of innovation models which can be understood as a model of innovation management based on the use of internal and/or external efforts for the exploration of new technologies leading to development, production and commercialization of invented products and/or services.
It was Chesbrough who has introduced open innovation as an innovation model in contrast to closed one for understanding the process of innovation and came up with a definition as follows: “…Open innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. [This paradigm] assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as they look to advance their technology…”
This innovation model is comprised of a complex issue, which includes many opinions and various perspectives which can be examined and investigated as globalization of innovation process, outsourcing of R&D, early integration for suppliers, users of innovation and application of technology and external commercial environment related to technology. It mainly focuses on interactive processes. Thus, knowledge and technology stay in or go out of the business more easily and firms take their major decisions by finding to use which of them to what extent.
Docherty coined the commonly used terms and descriptors about open innovation and these terms defined the core concept of open innovation. According to him, this model has three main phases. During the first phase, a pact is signed by external partners, which helps developing new products and/or services. This model allows peer-to-peer or supplier/clients agreements, which are called “codevelopment”. The second phase is the definition of co-development, but it contains some other factors (formal networks, consortia), which work together in a stage called “collaborative stage”. Then comes working together as a part of formal legal arrangement between partners/stakeholders in a joint development and/or business initiative and formally negotiate on risks and rewards. This type of arrangement or partnership is called “joint venture”.
Open innovation paradigm refers to leveraging external technological sources and having innovation for driving the internal growth and bringing unused intellectual property from external sources. In other words, open innovation model assumed that companies should use ideas from market and other external sources for developing internal ideas and advancing their value-creation techniques.
Whilst the fact above, open innovation is often contrasted with closed innovation where firms generate their own ideas of innovation, and then develop, build, market, distribute, finance and support themselves. Hence, closed innovation model argues the concept of self-reliance in R&D operations and it was acquired or adapted by many leading industrial corporations in the 20th century and it is very important for the firms that adhered to this as their organizational philosophy, so, successful innovation requires control on R&D operations. In the model of closed innovation, companies depended on the claim that they should control their innovation processes and that means the company must be under control. Therefore, companies had to produce their own ideas on fuzzy front-end innovation stage because they were responsible for development, manufacturing, marketing, distribution and services. Advocacy of self-reliance in closed innovation conceptualized as do-it-yourself.
Under this closed innovation model, firms need to closely control the exchange of innovative ideas even within the firms. Any open exchanges with actors outside the boundary of the firm will be discouraged. Closed innovation model highlights the timely protection of knowledge assets with intellectual property rights and through controlled communication. Also, closed innovation is viewed to be based on the fundamental assumption that most useful essential innovation may occur only within the boundary of the firm. As a corollary, firms adopting closed business model tend not to utilize the external sources by licensing in the technology nor allow other firms to exploit their knowledge by adopting an internal policy not to license out the core technology.
Another reason to opt for closed innovation is that practicing open innovation is challenging for most firms not only because it requires change in perception but also because of the traditional conditions for protection of intellectual property in law, especially patent protection. Patent law tends to discourage open exchange and communication, especially before the patent filing, as published and known innovative idea will not be protected. For that reason, since both contract law and IP law offer only weak supports for open innovation, open innovation may require particular innovative capability in firm to manage openness and interface it with the closed innovation model, through private ordering means (i.e. parties’ own solutions to a particular regulatory problem). This may be due to the fact that open innovation is even more difficult to practice with patents, as sharing or publication will destroy novelty of an inventive idea that would lead to loss of right. Sharing of inventive ideas – whether formal or informal – has to be carefully controlled if firms aim to patent on them.
Another principle of Chesbrough’s (2006) closed innovation is that firms believe innovation will make them market leaders and they can commercialize it to beat competitors. Closed innovation also supports complete authority in innovation.
Despite the significant upsides of closed innovation model, when applying the open innovation model, the company can use external resources such as technology and at the same time make available their own innovations to other organizations.
Respectively, under the open innovation paradigm there is an important flow of external knowledge into the organization which turns into projects in cooperation with external partners and causes the purchase and incorporation of external technologies. At the same time, the innovations generated within the company can be sold as technology and/or industrial property to other organizations since either they are not applicable within their business model or because the company has no capacity or experience to develop the invention. The result is that some products reach the market by using exclusively internal resources from the initial idea up to the commercialization of the final product. Other products are the result of incorporating external knowledge at different stages of their development which leads to an hybrid model where both innovation models may be exploited as deemed necessary within the same corporation.
Therefore, open innovation model is likely to promise more freedom to operate, less cost spent on R&D, extraction of otherwise would be unheard know-how and a stronger business model in which the company’s intellectual property is swiftly commercialized to its collaborators that would steer up the revenue.
In confirmation with the above, many studies on open innovation that focused on large firms found it a useful tool to enhance performance instead of implementing closed innovation model. Large firms are using open innovation successfully in their strategies. Small firms or SMEs are less attracted to open innovation because of their characteristics such as organization, culture, and strategy. SMEs lack both managerial and technical skills. Nevertheless, they could benefit from open innovation due to having less bureaucracy, increased willingness to take risks and ability to react to changing environments. Scholars argue that open innovation is useful for both large and small firms. Other scholars argue that for SMEs to overcome their challenge and increase performance, open innovation can be a useful tool.
Nonetheless, open innovation models come up against criticism. It seems to be preferential in the academic environment and sale of the books related to this topic is higher, but it is not accepted as a perfect model. In this context, Trott & Hartman confirmed that the openness might lead to knowledge insecurity and this represents the potential danger while the proposed challenge is striking balance between knowledge exchange and R&D, and to transform the knowledge produced by R&D into commercially viable outcomes. Therefore, information sharing/knowledge loss dilemma takes attention in open innovation model.
As a matter of fact, Almirall and Casadesus-Masanell has taken a further step considering the above downsides of open innovation models and realistically suggested that most organizations, regardless of being SMEs or large firms, found out that their innovation goals may involve a complex mix of open and closed innovation management model and more importantly, tailored uniquely according to organizations’ objectives.
As can be seen from the above explanations and discussions upon the comparative analysis made between open and closed innovation models, when it comes to choosing the most appropriate innovative process it should be said that business and integrated IP strategies of companies play very important role in deciding the form of innovation model. For all that, various researchers tried to understand substantial factors while making decisions between open and closed innovation models. In this respect, many studies addressed capabilities of the companies and their innovation promoting activities to determine the kind of the chosen model. For example, Robertson and Arundel explained in their study that companies with in-house R&D capabilities are more capable of attracting both closed and open innovation in comparison to the companies without in-house facilities or companies that depends on contracting out R&D operations. So, innovative activities are comparatively common between these companies irrespective of their R&D operations.
Besides, traditional conditions for protection of intellectual property rights especially in patent law tends to discourage open exchange and communication, hence offer only weak supports for open innovation which may require particular innovative capability in firm to manage openness and interface it with the closed innovation model.
As a conclusion, depending on the company’s IP strategy which should be founded by the collaboration of all the strategic units (C Level, sales & marketing departments, legal department, R&D department etc.) of the company and integrated with the business strategy, a company should take into consideration of its in-house R&D capabilities, its urge for external knowledge to drive the internal growth and bring unused intellectual property from external sources to create further intangible assets and technology, options and preferences to make available its own innovations to other parties, its choice of keeping some of its intangible assets secret,
(a) To either opt for exploiting open innovation model when it is feasible and advantageous provided that it copes with the traditional rules of its country’s intellectual property and contract laws for purposes of keeping its IP portfolio intact or
(b) Tend not to utilize the external sources by licensing in the technology nor allow other firms to exploit their knowledge by adopting an internal policy not to license out the core technology.
Respectively, we hold on to the idea that neither of the innovation models outweighs the other substantially and preferentially at least nowadays; therefore, open and closed innovation models shall be implemented under a hybrid scheme mostly in a way that open innovation model is interfaced with the closed innovation model through private ordering means (i.e. parties’ own solutions to a particular regulatory problem) which are to be calibrated based on company’s (IP+Business) strategic requirements, size, expertise and choice of law.
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