In thi.s way, Cisco kept up with the R&D output of perhaps theworld's finest industrial R&D organization, all without condtict-ing much research of its own.The story of Lucent and Cisco is hardly an isolated instance.IBM's research prowess in computing provided little protectionagainst Intel and Microsoft in the personal computer hardwareand software businesses. Similarly, Motorola, Siemens and otherindustrial titans watched helplessly as Nokia catapulted itself tothe forefront of
telephony in just 20
huilding on itsindustrial experience from earlier decades in the low-tech indus-tries of wood pulp and ruhber boots. Pharmaceutical giants likeMerck and Pfizer have also watched as a number of upstarts,including Genentech, Amgen and Genzyme, has parlayed theresearch discoveries of others to become major players in thehiotcchnology industry.
From Closed to Open
Is innovation dead? Hardly, as punctuated by the recent advancesin the life sciences, including revolutionary breakthroughs ingenomics and cloning. Then why is internal R&D no longer thestrategic asset it once was? The answer lies in a fundamental shiftin bow companies generate new ideas and bring them to market.In the old model
firms adhered to the fol-lowing philosophy:
Siiccessfiii innovation requires
ln otherwords, companies must generate their own ideas that they wouldthen develop, manufacture, market, distribute and service them-selves (see "The Closed Innovation Model"). This approach callsfor self-reliance: If you want something done right, you've got todo it
For years, the logic of closed innovation was tacitly held to beself-evident as the "right way" to bring new ideas to market andsuccessful companies all played by certain implicit rules. Theyinvested more heavily in internal R&D than their competitorsand they hired the best and the brigbtcst (to reap the rewards ofthe industry's smartest people). Thanks to such investments, theywere able to discover the best and greatest number of ideas,which allowed them to get to market first. This, in turn, enabledthem to reap most of the profits, which they protected by aggres-sively controlling their intellectual property (IP) to prevent com-petitors from exploiting
Tbey could tben reinvest the profits inconducting more R&D, which then led to additional break-through discoveries, creating a virtuous cycle of innovation.For most of the 20th century, the model worked — and itworked well. Thanks to it, Thomas EdisoEi was able to invent anumber of landmark devices, including the phonograph andthe electric light bulb, which paved the way for the establish-ment of General Electric's famed Global Research Center inNiskayuna, New York. In the chemical industry, companies likeDuPont established central research labs to identify and com-mercialize a stunning variety of now products, such as thesynthetic fihers nylon, Kevlar and Lycra. Bell Labs researchersdiscovered amazing physical phenomena and harnessed thosediscoveries to create a host of revolutionary products, includingtransistors and lasers.Toward the end of the 20th century, though, a number of fac-tors combined to erode the underpinnings of closed innovationin the United States. Perhaps chief among these factors was thedramatic rise in the number and mobility of knowledge workers,making it increasingly difficult for companies to control theirproprietary ideas and expertise. Another important factor wasthe growing availability of private venture capital, which hashelped to finance new firms and their efforts to commercializeideas that have spilled outside the silos of corporate research labs.Sucb factors have wreaked havoc with the virtuous cycle thatsustained closed innovation. Now, when breakthroughs occur.the scientists and engineers who made them have an outsideoption that they previously lacked. If a company that fundeda discovery doesn't pursue it in a timely fashion, the peopleinvolved could pursue it on their own — in a startup financed byventure capital. If that fledgling firm were to become successful,it could gain additional financing through a stock offering or itcould be acquired al an attractive price. In either case, the suc-cessful startup would generally
reinvest in new fundamentaldiscoveries, but instead, like Cisco, it would look outside foranother technology to commercialize. Thus, the virtuous cycle ofinnovation was shattered: The company that originally funded abreakthrough did not profit from the investment, and the firmthat
reap the benefits did not reinvest its proceeds to financethe next generation of discoveries.In this new model of
firms commercializeexternal (as well as internal) ideas by deploying outside (as well
The Closed Innovation Model
In closed innovation, a company generates, develops andcommercializes its own ideas. This philosophy of seif-reliancedominated the R&D operations of many leading industrialcorporations for most of the 20th century.
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