In the past, internal R&D was a valuable strategic asset, even a formidable barrier to entry by competitors in many markets. Large corporations like DuPont, IBM and AT&T competed by doing the most R&D in their respective industries and subsequently reaping most of the profits. Rivals who sought to unseat those powerhouses had to ante up considerable resources to create their own labs, if they were to have any chance of succeeding. Today, however, the leading industrial enterprises of the past have been encountering remarkably strong competition from many upstarts. Surprisingly, these newcomers conduct little or no basic research on their own, but instead, get new ideas to market through a different process.
This bares the question: Is innovation dead?
Hardly. For proof, look no further than the recent advances in the life sciences, including revolutionary breakthroughs in genomics and cloning. Then why is internal R&D no longer the strategic asset it once was? The answer lies in a fundamental shift in how companies generate new ideas and bring them to market. In the old model of closed innovation, firms adhered to the following philosophy: successful innovation requires control. In other words, companies must generate their own ideas that they would then develop, manufacture, market, distribute and service themselves. This approach calls for self-reliance: if you want something done right, you’ve got to do it yourself.
For most of the 20th century, this closed model worked — and it worked well. Under it, Thomas Edison was able to invent a number of landmark devices, including the phonograph and the electric light bulb, which paved the way for the establishment of General Electric’s famed Global Research Center In the chemical industry, companies like DuPont established central research labs to identify and commercialize a stunning variety of new products, such as the synthetic fibers nylon, Kevlar and Lycra. Bell Labs researchers discovered amazing physical phenomena and harnessed those discoveries to create a host of revolutionary products, including transistors and lasers.
But, toward the end of the century, the closed model began to erode due to a number of factors. Perhaps chief among these factors was the dramatic rise in the number and mobility of knowledge workers, making it increasingly difficult for companies to control their proprietary ideas and expertise. Another important factor was the growing availability of private venture capital, which has helped to finance new firms and their efforts to commercialize ideas that have spilled outside the silos of corporate research labs.
In this new model of open innovation, companies commercialize external and internal ideas by deploying new pathways to the market. Companies can commercialize internal ideas through channels outside of their current businesses in order to generate value for the organization. Some vehicles for accomplishing this include startup companies, possibly even financed and staffed with some of the company’s own personnel, licensing agreements, distribution partnerships. Ideas can also originate outside the firm’s own labs and be brought inside for commercialization. In other words, the boundary between a firm and its surrounding environment is less rigid, enabling innovation to move easily between the two.
At its root, open innovation is based on a landscape of abundant knowledge, which must be used readily if it is to provide value for the company that created it. However, an organization should not restrict the knowledge it uncovers in its research to its internal market pathways, nor should those internal pathways necessarily be constrained to bringing only the company’s internal knowledge to market. This perspective suggests some very different rules. For example, no longer should a company lock up its IP, but instead it should find ways to profit from others’ use of that technology through licensing agreements, joint ventures and other arrangements.
In the next post, we’ll be discussing successful ways to identify open innovation partners. For more information, please visit our resources section to view other open innovation materials.