Closed innovation vs. open innovation 2 What is open innovation, and how does it differ from previous models, like the closed innovation systems?

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1 Open Innovation Basics and the Local Environment Introduction Micro-, Small- and Medium-Enterprises are global drivers of innovation and business development depending on the knowledge-base as a key resource. Open innovation needs to be embedded in an overall business strategy that emphasizes the interchange of ideas, knowledge and know-how in value creation. In the 21st Century, SMEs cannot expect to do it alone, as single actors. They must connect to their local or global networks of information, technology, innovation and product development. 1 Closed innovation vs. open innovation 2 What is open innovation, and how does it differ from previous models, like the closed innovation systems? Before being open, innovation happened in closed environments often performed by individuals, scientists or employees. In a closed innovation: - the organizations strictly control the process and the out-come - the know-how is developed internally - innovative technologies are kept within the company or network until the new product is released on the market Additional characteristic principles of closed innovation are shown on Figure 1. The expression closed innovation came later, not before the paradigm of open innovation was popular by works of Henry Chesbrough, Don Tapscott and Anthony D. Williams 3. Closed innovation is perhaps best described by the innovation methods of old automotive giants such as Chrysler and Ford Motor Companies. 4 1 In Kowalsky S. P.: SMES, Open Innovation and IP Management: Advancing Global Development 2 For more information, see Chapter Types of Innovation by strategy of this Guide 3 In Chesbrough, H.W. (2003). Open Innovation: The new imperative for creating and profiting from technology. Boston: Harvard Business School Press ; and Tapscott: Wikinomics: How Mass Collaboration Changes Everything. 4 In Kowalsky S. P.: SMES, Open Innovation and IP Management: Advancing Global Development

2 To profit from R&D, we must discover it, develop it, and ship it ourselves. If we discover it ourselves, we will get it to the market first. If we create the most and the best ideas in the industry, we will win. The smart people in the field work for us. CLOSED INNOVATION We should control our Intellectual Property, so that our competitors don't profit from our ideas. Figure 1. Closed Innovation principles 5 Closed Innovation has its own benefits: When the internal network is big and significant enough to have all the resources to develop a constantly new product or service for a global market, it is reasonable use closed innovation methods within a selected network. Open innovation, on the other hand, is more flexible, it involves networking with other companies, R&D facilities, interacting with start-up ventures, public research institutes, universities, external suppliers and sharing and accessing outside information and technology in an open-ended way. This way it is far more fluid, adaptable and organic. It is critically important to note that open innovation does not refer to free knowledge or technology. It only refers to collaborative networking, and may still involve even significant payments of license fees for Intellectual Properties. 6 Essential factors of open innovation are: - Networking and collaboration, building contacts, creating opportunities - Entrepreneurship, thinking creatively to find solutions 5 In Open Innovation 6 In Wikinomics How Mass Collaboration changes everything

3 - Access to finance, learning how to be a magnet for investment - Access to information, which is the key driver of innovation Compare and contrast the characteristics of open innovation principles in Figure 2 with the already seen principles of closed innovation in Figure 1. External R&D can create significant value: internal R&D is needed to claim some portion of that value. We don't have to originate the research to profit from it. If we make the best use of internal and external ideas, we will win. Not all the smart people in the field work for us. We need to work with smart people inside and outside the company. OPEN INNOVATION We should profit from others' use of our IP, and we should buy others' IP whenever it advances our business model. Figure 2. Open Innovation principles 7 Usually, as small and micro-enterprises are operating in a local environment, it is an exploitable advantage and not a danger if they collaborate with other actors of other local environments in a global network. In different local areas the know-how can be the same, but the target group of the SMEs in the field are different. In addition, smallest enterprises usually don t have too many resources to invest in innovation. With an open innovation network, they can develop new products or services sharing the investments but producing individual profit in their field in that local area. Clusters, by increasing the competitiveness of single 7 In Open Innovation

4 firms, provide macroeconomic benefits. 8 Business Ecosystems of innovation link global networks with people, institutions (universities, government agencies, etc.) and other companies, in their own or different countries, to solve problems, source knowledge, generate ideas and drive innovation. Small and micro-enterprises can maximize their potential through integration into these networks and ecosystems. 9 The business ecosystem concept first appeared in Harvard Business Review (see: in May/June 1993, and won the McKinsey Award for article of the year. 10 What Does Business Ecosystem Mean? The network of organizations including suppliers, distributors, customers, competitors, government agencies and so on involved in the delivery of a specific product or service through both competition and cooperation. The idea is that each business in the ecosystem affects and is affected by the others, creating a constantly evolving relationship in which each business must be flexible and adaptable in order to survive, as in a biological ecosystem. 11 User-driven open innovation in the local area: Living Labs Living Labs are open innovation ecosystems in real-life settings in which user-driven innovation is fully integrated in the co-creative process of new services, products and societal infrastructures. 12 The Living Labs model opens up the phases of development for end-user participation from an early stage of the creative process. Living Lab-systems are expected to enable micro, small and medium-sized enterprises (SMEs) to create lead markets by overcoming existing barriers on various local and regional markets in Europe by this end-user involvement and co-creation. 13 What ensures the success of the Living Lab model is that the special needs of the end-users in one local area can be easily tackled in throughout 8 Most of these benefits you can find in detail in of this Innovation Guide 9 In Kowalsky S. P.: SMES, Open Innovation and IP Management: Advancing Global Development 10 Business Ecosystems, in Wikipedia. 11 Business Ecosystem in Investopedia 12 Living Labs for user-driven open innovation; European Commission Living Labs for user-driven open innovation; European Commission.

5 the development. This way, region-specific versions of the same product can be produced. The European Network of Living Labs (see: ), that was founded in 2006 and includes 212 members, is continuously supported through the LLL(Lifelong Learning) and other programmes. Please stop and think: would you empower your potential end-users to take part in product-development phase? Would you organize a meeting for them? Whom would you invite? How would you organize a brainstorming? Future prospects with online global networks of innovation Globalization is rapidly creating new market opportunities that require new innovation strategies. Within soon SMEs will need to join global innovation networks, as the global sourcing of knowledge and capacity will consolidate research and development, focus innovation, lower transaction costs and advance product commercialization. 14 Please stop and think: Are there specific questions you are interested to get answers from organizations, people in a global network? It is likely that this process would go hand in hand with shifts in managerial culture; building a culture of open innovation requires rewarded teamwork and organizational changes that foster internal and external collaboration. Global innovation networks are forming. Participating in them of course involves risk taking. Nevertheless, SMEs are about to recognize it within the next decades that risk is manageable, shareable and reduced by a global innovation network 15. Examples of online innovation networks: InnoCentive (see: started in 2001, crowdsources research and development for biomedical and pharmaceutical companies, among other companies in other industries. InnoCentive provides connection and relationship management services between "Seekers" and "Solvers." Seekers are the companies searching for solutions to critical challenges. Solvers are the 185,000 registered members of the InnoCentive crowd who volunteer their solutions to the Seekers. Solvers whose solutions are selected by the Seekers are compensated for their ideas by InnoCentive, which acts as broker of the process. InnoCentive recently partnered with the Rockefeller Foundation to 14 In Kowalsky S. P.: SMES, Open Innovation and IP Management: Advancing Global Development 15 In Kowalsky S. P.: SMES, Open Innovation and IP Management: Advancing Global Development

6 target solutions from InnoCentive's Solver crowd for orphan diseases and other philanthropic social initiatives. Innovation Exchange (see: is an open innovation vendor which emphasizes community diversity; it sources solutions to business problems from both experts and novices. Companies sponsor challenges which are responded to by individuals, people working in ad hoc teams, or by small and midsize businesses. In contrast to sites focused primarily on innovation in the physical sciences, Innovation Exchange fosters product, service, process, and business model innovation (see: 16 Other interesting examples for you to check-out: Innocentive (www2.innocentive.com/) - open innovation problem solving BrainReaction.net ( online brainstorming rooms TekScout ( - crowdsourcing R&D solutions IdeaConnection ( - idea marketplace and problem solving Yet2.com ( - IP market place PRESANS ( - connect and solve R&D problems Hypios ( - online problem solving Innoget ( - research intermediary platform One Billion Minds ( - online (social) challenges NineSigma ( - technology problem solving Ideaken ( online brainstorming 17 In this chapter you learnt the difference between open and closed innovation models and by now you can see their potential benefits. You already know why the living lab model and open innovation networks can enhance your success in developing your products in the local environment. 16 Open Innovation. Wikipedia article Open Innovation. Wikipedia article.

7 Bibliography Chesbrough, H.W. (2003). Open Innovation: The new imperative for creating and profiting from technology. Boston: Harvard Business School Press ; Kowalsky S. P.: SMES, Open Innovation and IP Management: Advancing Global Development. me02_2-related1.pdf Living Labs for user-driven open innovation; European Commission. Open Innovation Open Innovation. Wikipedia article. Tapscott (2006): Wikinomics: How Mass Collaboration Changes Everything. Portfolio, Penguin Group, USA Further reading Chesbrough, H. (2003), "Open Innovation: The New Imperative for Creating and Profiting from Technology", Harvard Business School Press. Ilkka Tuomi (2006) Networks of Innovation: Change and Meaning in the Age of the Internet. Oxford University Press Online Innovation tools. Open Innovators. S. Nambisan, M. S. Sawhney (2008) The global brain: your roadmap for innovating faster and smarter in a Networked World. Wharton School Publishing, New Jersey The principals of distributed innovation.