The concept of open innovation is receiving considerable importance both in practice and academia and is widely found to be associated with ability of firms to gain competitive advantage in volatile environment. The current study is aimed at discussion of closed and open innovation in the light of extant literature. The innovation patterns of Procter and Gamble are studied into greater detail and shift of company form close innovation to open innovation has been discussed. Furthermore, the management of open innovation and associated outcomes for organisation has been detailed in the report. Finally, the conclusion has made by considering the important aspects of report.
Being innovative is the requirement of the current volatile environment and organisations need to stimulate innovation in its processes, products and management philosophy. The competition in the global economy is laying emphasise on the learning organisations and it is initiating the substantial need to follow innovative patterns with an aim of satisfying changing needs of consumers (Goldstein, Hazy and Lichtenstein, 2010; Berman, Kesterson-Townes, Marshall and Srivathsa, 2012). The drastically changing environment and technological interventions demand from firms to collaborate with external environment to pursue resources for strengthening their internal research and development (Cronin, 2014; Vasan and Przybylo, 2013). Increased utilisation of resources from external environment fosters the organisations to make a shift from closed innovation to open innovation model.
The concept of open innovation has been introduced and promoted by Chesbrough (2004), who provided that organizations need to incorporate external philosophies in addition to the internal ideas with an aim of advancing its technology and to innovate in globalized business environment. The open innovation is derived from the notion that lines between the organizations and environment are becoming blur and there are greater chances for innovation to flow within firms and environment (Terwiesch and Xu, 2008). The below mentioned figure 1 is depicting an open innovation model for firms which is reflecting that it is the combination of internal and external factors.
Figure 1. Open innovation model
There are three forms of open innovation model which include; inbound open innovation, outbound open innovation and coupled innovation process (Van et al., 2009). The inbound innovation refers to the ability of firms to use external sources for innovation by implying in-license method of developing a technology outside of organization rather than developing it in-house. Opposite to it is the outbound innovation in which organizations rely on external pathways for developing its products or processes (Vanhaverbeke and Cloodt, 2006). The out-licensing is done with the external companies by allowing them to carry out further development in the product or process of firm. Finally, the coupled innovation process is the mixture of inbound and outbound innovation, which allows the companies to closely work with each other with an aim of carrying out innovation jointly (West and Gallagher, 2006). One significant example of coupled innovation can be joint venture which is carried out for capturing market through innovation.
It has been asserted by Enkel et al. (2009) that organizations cannot innovate in isolation and to stay in competition, organizations need to acquire and utilize resources of external partners. The business models of collective creativity are providing new strategic approach to the firms for innovating in a flatter and open business environment (Dodgson et al.,. 2006). The collective creativity model has suggested that open innovation can assist the organizations to gain quick access to the new technology which can otherwise be difficult for the company to access. Therefore, it can also help in lowering the market risk and can lead towards competitive advantage.
One significant example of corporation who has relied on open innovation is of Netflix, which has changed the TV experience of consumer by crashing the previous linear TV design with internet TV (Cronin, 2014). The notion has been adopted by Intel Corporation as well, which is the leading company in Semiconductor market. The Intel has separated its research and development division from its production and provided that they can bring breakthrough innovation without formal R&D division by relying on external sources of research (Spithoven, Vanhaverbeke and Roijakkers, 2013).
The closed innovation paradigm depends on the notion that most of the control of intellectual property should be retained internally by the firm. The concept was formally described by Lichtenthaler (2011) and it has roots in the 20th century when there was minimum involvement of Government and external bodies in scientific development of the company. During that era, the research and development was carried out in house and organisations have attempted to become self-sufficient to carry out innovation in their products, processes and overall business operations (Poot, Faems and Vanhaverbeke, 2009). The closed innovation was thought to be a source of competitive advantage due to the fact that internal research and development required huge investment which was acting as a barrier for hindering the entrance of new competitors (Letaifa and Rabeau, 2013). The below mentioned figure 2 is visually representing the closed model of innovation in which all of the operations are restricted within the boundary of firm and all of internal research is commercialized in into external market.
Figure 2. Closed model of Innovation
The closed innovation has not been considered as beneficial by the advocates of flat organisational structure which are emphasising that there should an active collaboration between external and internal environmental factors in the process of innovation (Letaifa and Rabeau, 2013). However, this concept has been criticised by the researchers the close innovation can help to overcome the ‘Not Invented here Syndrome’ (NIHS), which can be characterized by the following aspects; lack of thoughtfulness of other’s work, tendency to devalue the work carried by others, uncertainty about future supply and lack of willingness to participate (turf war) (Perkmann and Walsh, 2007). The inclination towards NIHS and favourability of internal products over the external products can restrict the organizations from gaining the vital advantages of open innovation in an effective manner. Therefore, the aspect of closed innovation could be favourable in such circumstances.
The below mentioned table 1 is providing a comparison of closed and open innovation models and it is clearly indicating that open innovation is focusing more on the integration with external environment in comparison with close innovation. Its emphasis is on developing a better business model rather than focusing on taking the first mover advantage (Savitskaya, Salmi and Torkkeli, 2010). Along with this, the open innovation has reported to have many advantages over closed innovation which encompass taping the talent and expertise from external environment to gain competitive advantage (Rahman and Ramos, 2010). The open innovation offers cost effective solution of innovation and it can help in growth of business in current changing business environment.
Table 1. The Comparison of Closed and Open Innovation
P&G is the world’s leading company in consumer goods which has headquarter in United States and is capturing the consumer markets worldwide. The company has huge revenue stream with net income of US $ 7.03 billion and total number of 110,000 employees. By nature of product type the brands of company are spreading over a wide range including; cosmetics, dishwashing, feminine hygiene, health care products, hair care, household, laundry, detergent and skin care (Sakkab, 2002). P&G is relying on constant innovation of its products with an aim of capturing new markets and satisfying the changing needs of diverse customers. The concept of innovation is based on nature of operations of P&G which are prevailing in competitive and mature global market.
P&G had well formulated internal department of R&D but it was felt by the management that cost of technology and research was increasing at a rapid rate it was not in the favour of sustainability of the organisation (Sakkab, 2002). The close innovation model of the P&G was falling short of the innovation expectations of the company and it was not increasing the learning capabilities of organisation due to lack of connection with outside world. The results were in the form of increasing cost of research and development than the sale growth of company. It has been recognised by Shaughnessy (n.d) that number of solutions to the problems of P&G were lying outside of the company and it was realised by the management that huge number of scientists are working in the similar areas of R&D which are either equal to or better than the internal expertise level possessed by P&G. Therefore, the aspect of reducing cost through open innovation was the main driver behind making a shift from close to open innovation model.
The open innovation strategy of the P&G was referred as organisation 2005 and it termed R&D (Research and Development) as C&D (Connect and Develop) (Torkkeli et al., 2009). The P&G has shown the rapid pattern of registering patents and the frequency is 8 per day. It has been asserted by the Rahman and Ramos (2010) that in order to sustain in the long run, large corporations need to rely on concept of “technological synergies”. The P&G has realized the importance of technological synergies and they established a culture of making growing by making connections with outside environment (Bianchi et al., 2011). The main aim of organisation 2005 was to initiate change and innovate by considering aspect of external environment into account and by increasing collaboration with outside factors. It has been mentioned by Perkmann and Walsh (2007) that collaboration and integration is the core of innovation and P&G was aimed at carrying out break through innovations by combining its known knowledge with new ways or new ideas from outside world. The shift from close to open innovation has required number of changes in the culture of organisation and it was managed properly by P&G.
At earlier stages of open innovation, the management of new methods of innovating has been carried out by creating a Technology Acquisition Group (TAG) (Dodgson, Gann and Salter, 2006). The main objective of this group was to seek the compatible technologies from outside the organisation with an aim of converting technologies into innovative products and customer solutions. Along with this, the group was also responsible to seek out any licensing opportunities for internal technology to make it more profitable for the organisation. This objective of organisation was supported by deal making or technology trading expo which was organised by P&G and its substantial technologies were presented for licensing (Shaughnessy, n.d). In trading expo, different suppliers were also invited with an aim of finding compatible technologies to strengthen the production and innovation requirement of P&G.
Along with these early approaches, the P&G has continually relied on buying entrepreneurial companies and internal seeding for encouraging new ideas and incorporating new technology into its operations (Sakkab, 2002). The open innovation has mainly been embraced in P&G by shaping its culture in the direction which has more support for building and maintaining connections with outside actors (Dodgson, Gann and Salter, 2006). It can be clarified by an instance of Pur Sachet, which is the product of P&G, and it has been developed through internal seed funding and by giving free hand to young researcher to develop the product. Therefore, it can be seen that in P&G open innovation is being managed by involving employees and maintaining lose structure of control within organisation. The C&D strategy of P&G has served as a way of life for employees and made them free for pursuing new possibilities into their new product development cycle.
In terms of managing the technologies breakthroughs in open innovation, the P&G has relied mainly on data mining, simulation and modelling and rapid prototyping (Gassmann, Enkel and Chesbrough, 2010). Along with this, the P&G has created a global technology council which has served as an incubator between external technologies relevant to P&G and internal system. The council has assisted in managing ways which can help in leveraging of internal technology to complement external research and development (Huston and Sakkab, 2006). The P&G is also maintaining an internal website naming InnovationNet which has provided a platform to employees to share new ideas within P&G (Feller, et al., 2009). In related vein, the P&G has initiated and managed the concept of ‘Ultimate Supply System’ which has assisted increased collaboration and sharing of information with suppliers. In this way, the connection with suppliers of technology and R&D is maintained with an aim of reducing cost, increasing sale and offering innovative products to the customers at right time and place.
Similarly, the P&G has a group ‘create-innovate’, which is responsible for bringing innovation in design of the products and its packaging by developing a prototype (Henkel, 2006). The prototyping of the company enables it to avoid failure from innovation at later stage and helps to predict the expected value of customers through innovative products. The simulation software which has been implied by P&G for managing open innovation through prototyping are not developed in-house and can be availed easily from market.
In general, the P&G is maintaining the values of extensive sharing of innovation which has been considered as crucial for managing open innovation. The human resource management practices of P&G are also in favour of innovation. It has been argued in an interview that P&G hires people with greater innovative talent, cognition abilities and greater analogy skills (Heimberg, 2008). Therefore, the flexible and open workforce of P&G is contributing to strengthen its capacity of innovation at a rapid rate. Moreover, it has also been provided that among 26 R&D of P&G, all members are connected with consumers by prioritising the values of customer comes first within organisation. In 2013, the company has undertaken an initiative of launching a website by collaborating with external partners with an aim of increasing the likelihood of feeding new ideas into business. The website ‘pgconnectdevelop.com’ has been termed as an effective initiative of the company to manage open innovation.
The open innovation of P&G has contributed to transform new technology into products which was not the case before implementation of C&D and only 10% of technologies were transferable to the products which were offering profit to the organisation. However, most of profitable innovations of P&G were supported by C&D which included Olay Regenerist, Swiffer Dusters, bounce dryer bar, crest white strips and crest spin brushes. During the initial stages of C&D the innovation profit of the P&G was up to 15% and it has increased to 50% till 2008, which is a significant increase (Perkmann and Walsh, 2007). The ready to go solutions for most of P&G products has contributed to reduce the cost of carrying out in-house research and development and it has substantially contributed to increase the revenue stream of the company (Grönlund et al., 2010). Along with this, it has also enhanced the ability of P&G to pursue talented and highly skilled workers form outside world which are contributing to revolutionise the operations and production of the company. The flexibility of P&G has enhanced to create and disband teams as and when required by successfully hunting talented and skilled resources (Bianchi et al., 2010).
The open innovation has contributed to reduce risk associated with innovation by transferring the competitors of company into collaborators which are helping the company in searching solution of its problems. In this way, the potential of synergism has increased for P&G and has led to breakthrough innovations (Sousa, 2008). The open innovation has assisted P&G in improving the quality of products and services and an active research and development has helped to identify and satisfy changing needs of customers in an appropriate way (Van, 2007). Therefore, the timely and innovative solutions has generated greater value for customers and it has contributed to increase the customer base of P&G. Sales revue of the company has escalated to the extent which was not possible to achieve in closed innovation model (Annon, 2005). Currently, the net income of company has reached to $ 0.73 billion and the company has become most recognised global player.
It is evident that innovation success rate has been tripled by the P&G which is an indication of success of open innovation approach of the company. Therefore, the increasing transformation of innovative technologies into products and increasing sales of innovative products are contributing to enhance the growth prospects for company (Gassmann, Enkel and Chesbrough, 2010). Along with this, the revolutionary and break through innovations of P&G which has made successful by its C&D approach, has contributed to offer competitive advantage to the company (Shaughnessy, n.d). Currently, the rate of offering innovative solutions by P&G is greater and it has enabled the company to outperform its competitors. It can be seen by the fact that at global level, one significant competitor of P&G is Unilever, which has net income of $ 5.3 billion which is much less as compared to $ 7.3, net income of P&G. Therefore, the P&G has gained much from its open innovation model in the form of increased sales, growth, customer base, and competitive advantage.
In conclusion, the current report has focused on closed and open innovation models of innovation and evidences form literature has shown that open innovation is more beneficial than closed innovation. The open innovation has been seen in specific context of Procter and Gamble which is successfully performing operations across the world. The P&G has focused on open innovation by making a shift from research and development to connect and development and it has significantly benefited the company in the form of increased profitability, growth and competitive advantage. Therefore, in the light of these evidences it can be seen that open innovation is more supportive to current volatile business environment.
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