Innovation types by strategy

Innovation by firms' innovation strategy can be divided into two groups: open innovation and closed innovation.

(Figure 7: Innovation types by strategy)

Open innovation consists of strategies by which firms can acquire technologies they need and exploit technologies they have developed. In open innovation firms get their technology from multiple sources. Open strategies for innovation seek efficiency through effective partnering.1 Nobody ever created a breakthrough with open innovation.2

Closed innovation employs strategy of hiring the smartest technical people in an industry. It assumes that a firm must itself develop its own new products and services and be the first company to get them to market. It assumes that the firmthat leads the industry in R&D spending will eventually lead the market. Finally, it assumes that a company should hold on to its intellectual property tightly to keep the competition from benefiting from the ideas.3

Please stop and think:
Now it's your turn! Which strategy does your organization use? Just take time and think! There is no benefit in arguing which strategy is better or more efficient. Let us look at the example below.


In 1981 the Xerox personal computer (PC) was a leading-edge high-performance computer with the ability to send, receive and print high-quality documents. Xerox built the entire Star system, from chips through software including manufacturing, distribution, service and financing. You could not really buy a single Xerox Star. You could buy a three-user system with a network facility and a shared laser printer for about $17,000. This is the example of the closed innovation.

In contrast, the IBM PC cost about $3,000 and was marketed broadly to individuals and small businesses. Among the factors in the success of the IBM computer were the brand name, the much lower price, and the use of third-party dealers for hardware and software. The product itself was an example of open innovation. The processor came from Intel, the operating system from Microsoft, and the application software from third parties. What worked for IBM in the open-innovation approach was that it powerfully exploited the strengths of its partners. IBM did not try to create or control all of the technology itself and market forces quickly created competition among suppliers. IBM recognized that the product was a personal computer rather than a corporate computer.

Although Xerox had been marketing the Alto and the Star for several years, it was disastrously slow to recognize and adopt strategies that are more effective. Furthermore, it did not powerfully exploit the strongest methods of the closed-innovation paradigm. For example, it did not aggressively protect its technology position with patents. It did not develop an effective licensing strategy, nor did it use patents to slow down the competition.

Without question, IBM's open-innovation approach to the personal computer dominated in the market.

However, it is interesting to remember that IBM's execution of open innovation did not keep IBM in the driver's seat. Today personal computers are more often referred to as "Wintel" computers than as "IBM computers." That is an acknowledgment that architectural control and market dominance now are driven by the Windows operating system from Microsoft and the processor chips from Intel. Lacking any proprietary advantage, IBM lost its hold on the PC market. Leadership passed to the companies with the key technologies.

1 Mark Stefik and Barbara Stefik (2004). Breakthrough. Stories and Strategies of Radical Innovation, p. 235
2 Ibid, p. 10
3 Ibid, p. 237
4 Ibid, p. 238