The Journey From Closed to Open Innovation

Published by MBA Skool Team, Published on December 25, 2011

Era of Closed Innovation

‘If you want something done right, you’ve got to do it yourself’

For a good part of the 20th century, most leading companies followed a very conservative approach to innovation.  They laid emphasis on self reliance and control for successful innovation, thus generated, developed and commercialised their own ideas. They invested heavily in setting up their internal R&D, hired the best and brightest minds in the business and reaped the benefits that followed. A well established R&D department was increasingly being looked at as a strategic asset, one that provided a competitive edge and also deterred smaller players from entering certain markets. This methodology of closed innovation worked well for various companies such as Xerox (R&D developed their own toner, copier, light lens, feeding and sorting systems), Dupont (Central research labs responsible for the birth of synthetic fibres like Kevlar and Lycra) and Bell Labs (R&D responsible for revolutionary discoveries including transistors and lasers).

Closed to open innovation

For years this was tacitly considered to be the right way of bringing new ideas into the market, however recent times have seen a paradigm shift in the approach to innovation.

The Path to Open Innovation

The man responsible for coining the term of Open Innovation Henry Chesbrough has outlined several factors that have led to the erosion of the Closed Innovation Model.

a. Increased availability and mobility of skilled people

Lately, availability of highly skilled and trained employees has increased owing to the surge in the number of college graduates.

Moreover companies are finding it hard to retain the talent as it has become easier for highly trained employees of research centres to switch jobs or start a company on their own.

Competing firms can thus gain access to valuable experience and capabilities at a fraction of the cost of internal development. Therefore companies today are questioning the decision to invest heavily in their internal research function.

b. Increase in the number of Venture Capitalists

The closed approach is initiated with the generation of ideas, which are screened and filtered during research; the ones that have merit are transferred into development and then eventually into the market. The ideas that do not make the cut are either shelved or worked on further. However owing to budgetary constraints a lot of research ends up lying idle for a long time before it can see the light of the day. Prior to the availability of venture capital resources, employees had little incentive to leave the internal R&D departments of their firms. With the increased availability of venture capital, employees now have the option to leave their firms taking shelved research ideas with them and starting new ventures. Companies are thus at the risk of losing potentially good ideas before capturing their value.

c. Increased capability of external suppliers

The number of external suppliers has increased dramatically in most industries, preventing companies from staying vertically integrated. Often these suppliers belong to highly specialised companies which can do a better job than what can be done internally. Moreover these suppliers are available to all companies putting a lot of pressure on them.The tremendous growth of 3PLs and 4PLs providers in the supply chain context is testimony to this fact.

The erosion of the traditionally vertically integrated company has led to the evolution of a new approach called ‘Open Innovation’

A look at Open Innovation

“The use of purposive inflows and outflows of knowledge to accelerate internal innovation and to expand the markets for external use of innovation, respectively” (Chesbrough, 2006)

The Open Innovation model is based on the belief that knowledge today is widely distributed and no company, no matter how big can innovate effectively on its own. It is a participatory and distributed approach wherein the boundary between a firm and its surrounding environment is more porous, enabling innovation to move easily between the two.

Open Innovation model

There are two facets to open innovation

  • The “outside in” aspect, where external ideas and technologies are brought into the firm’s own innovation process.

Eg Firms like Dell, P&G, Starbucks and IBM have turned to co creation and crowd sourcing for the design of their new products.

  • The “inside out” part, where under-utilized ideas and technologies in the firm are allowed to go outside to be incorporated into others’ innovation processes. This aspect is less recognized and is yet to gain acceptance by many companies.

Eg companies can find ways to profit from others’ use of a patented technology through licensing agreements, joint ventures and other arrangements.

Parting Note

Companies are increasingly rethinking the basic process through which they generate ideas and bring them to market. They’re looking to harness external ideas while leveraging their in-house R&D functions. They are turning to alternate channels such as social media to gather insights and form a strong network of co creators.  This forms a sustainable mode of operation as companies are increasing involvement amongst the people and hence their access to intellectual capital.


Chesbrough, H. W. (n.d.). The Era of Open Innovation. Retrieved from

Open Innovation: Benefits of crowdsourcing. (n.d.).

PRESANS. (n.d.). The Erosion of the Closed Innovation Paradigm. Retrieved from Open your innovation:

This articles has ben authored by Zehra Ladiwala from NMIMS.

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