Remember the famed Bell Labs, once a powerful R&D center for the telecommunication equipment company Lucent Technologies (acquired by Nokia in 2016)? Bell Labs’ researchers are credited with the development of radio astronomy, the transistor, the laser, the Linux operating system, and the programming languages C and C++. Nine Nobel Prizes (eight in Physics and one in Chemistry) have been awarded for work conducted at Bell Labs.
And yet, all the intellectual might of Bell Labs did not prevent Lucent from consistently losing its market share to Cisco, a company that did almost no internal research.
Another story is the one of Palo Alto Research Center (PARC), which for 30 years has been part of Xerox Corporation. Despite receiving lavish R&D investments from the parent company, PARC failed to create significant value for Xerox and its shareholders.
In retrospect, one can say that the inability of two innovation powerhouses to provide a competitive advantage to their parent companies signaled the sunset of the era of closed innovation and the dawn of the era of open innovation.
What Went Wrong with Closed Innovation?
For a long time, internal R&D has been viewed as a strategic asset and an important competitive tool for any large organization. Because internal R&D wasn’t cheap, the large and deep-pocketed corporations used it as a weapon to protect its market position from the less funded competitors. If you were big, you could innovate and win the competition; if you were small...well, you simply couldn’t.
But then, completely new entrants to the market began emerging. What was remarkable about them is that they conducted little or no basic in-house R&D. Instead, they preferred to cooperate with other, often smaller, companies engaged in more basic research.
Three major factors have fueled this trend. First, the abundance of highly-trained people with college and post-graduate degrees. This abundance was helped by the increasing internal mobility of this workforce along with the growing inflow of high-quality professionals from abroad. As a result, knowledge and experience have ceased being the exclusive property of a few; they began belonging to “everyone.” (As Sun Microsystems’ co-founder Bill Joy reportedly said: “No matter who you are, most of the smartest people work for someone else.”)
Second, the Internet and the host of modern telecommunication technologies have dramatically reduced the cost of starting and running a business. As a result, small, nimble, and brash startups have begun relentlessly challenging large and inflexible incumbents.
Finally, the nature of innovation itself has changed. Modern innovation occurs at the cross-borders of different disciplines, and no company, no matter how large, can afford to hire researchers from many different fields. Innovation now happens when people with different but complementary skills and experiences put their heads together - regardless of where they work.
By publishing his now-classic 2003 book, Prof. Henry Chesbrough was the first who said it loud and clear: the era of closed innovation was over.
Does Internal R&D Have a Future?
It would, however, be a huge mistake to think that the end of “closed innovation” means the end of internal R&D. Quite to the contrary: internal R&D efforts will play an important role in any organization’s innovation activities. What has changed is that internal R&D has stopped being closed innovation; it is now internal innovation.
In my previous post, I argued that open innovation is not a “special” type of innovation; it is part of a single “innovation body.” Open Innovation serves as a branch extending over the corporate walls to reach out to the diverse pools of external talent. But it can be successful only if it’s tightly connected to the other side that is utilizing the innovation potential of the company’s employees.
In many respects, it’s internal, not open, innovation that represents the foundation of the corporate innovation strategy. Only internal innovation teams can identify and properly formulate problems facing organizations. Only internal innovation teams can fully understand incoming external solutions to select those that make sense. Only internal innovation teams can ensure the successful integration of external information with the knowledge available in-house. It’s only at this midpoint of the problem-solving process - at the stage of generating potential solutions to the problem - that open innovation is superior to internal.
Organizations, therefore, should consider internal and open (“external”) innovation as different, complementary tools in their innovation management toolboxes. There is no sense in discussing which tool is better; each should be used at its proper time and place.
Building Internal Innovation Networks
Many organizations, especially in the tech sector, organize their internal innovation activities in the form of internal innovation networks (IINs).
In addition to supporting open innovation, there are at least four important benefits IINs can bring to any organization.
First, IINs provide a communication platform between different corporate units that in many organizations often have no institutional space to discuss strategic issues. By providing such a platform, IINs increase the efficiency of the decision-making process and reduce the need for face-to-face meetings, something that has become of paramount importance during the coronavirus pandemics.
Second, IINs help foster the culture of collaboration, bringing together corporate units that are traditionally involved in the innovation process, such as R&D and Marketing, with those that are not (Business Development, Finance, Legal, HR). I already wrote about the notorious “NIH (Not Invented Here) Syndrome.” It’s useful, however, to remember that the NIH Syndrome manifests not only as a rejection of external knowledge and expertise but also as resistance to intra-company collaboration, as individual units are often reluctant to share their findings with others. By breaking internal silos and promoting intra-company collaboration, IINs enhance the overall innovation potential of the organization.
Third, IINs can be used to find solutions to problems that individual units have failed to solve on their own. Such problem-solving could be especially productive in multinational corporations with numerous units spread over geographic and time zones. People in different units, often brought together as a result of M&A, rarely communicate with each other and almost never meet face-to-face. Yet, often one unit may possess specific knowledge that is desperately needed—and can be immediately implemented–in another. Connecting such “dots” through IINs can result in significant savings of time and money for internal R&D.
Fourth, IINs help identify the organization’s emerging thought leaders, who – especially in junior positions and in geographically remote units – often remain unnoticed to the corporate leaders. IINs provide a voice to every employee regardless of their rank and location in the company. Besides, the very format of online communication is especially attractive to younger workers who play an increasingly important role in the global marketplace.
In summary, when developing a viable corporate innovation strategy, organizations must create a balanced portfolio of internal and open/external innovation programs. Yet corporate innovation leaders should always remember that the full potential of any innovation program can only be realized by the concerted effort of properly connected people within organizations. Or, putting this differently, the power of corporate innovation comes from the strength within.