12TH MARCH, 2020

What's The Difference Between Open And Closed Innovation?

The management of innovation within companies is constantly evolving. Traditionally, research and development (R&D) was an in-house concept, but with technology constantly moving on and the world getting smaller, this type of set up alone is becoming less common. Here we look at the two different approaches companies may take to innovation - ‘open innovation’ and ‘closed innovation’ - and discover what they’re all about.

So what exactly is innovation?

What innovation actually is has long been a topic for debate. Look online or in the dictionary and you’ll see the general consensus is that it’s about creating a new device or method, or building something new.

Essentially, for something to be legitimately referred to as an innovation, an idea must address a specific need and be replicable at an economical cost. Innovation itself is about applying research and information in such a way that increases the value of something, essentially making it more useful and desirable. In business, it involves coming up with ideas to boost customer satisfaction and meet customer needs and expectations.

Why is innovation so important?

Innovation is essential if a company is to survive and grow in an ever more competitive world. It provides a company with a niche and an edge over competitors. It also enables companies to break into new and emerging markets, leading to greater opportunities to build brand awareness and diversify product ranges; which of course can mean more profit.

Innovation also provides inventors with an outlet for their creativity, and a chance to be proactive in moving their ideas forward. Companies enjoying an innovative culture are more likely to experiment and expand, making scientific and technological strides forward in the process. It’s great news not just for the individual company, but for the industry it operates in as well as the wider economy through job growth.

What is open innovation and closed innovation, and how are they different?

The main difference between open and closed innovation lies in the way the innovation comes about. Companies engaging in closed innovation carry out work in a self-contained innovative environment, whilst those using open innovation methods rely on external knowledge sources for their innovation management strategies.

Closed innovation is based on the opinion that innovation is down solely to internal staff along every step of the creative process. Initial ideas come from in-house staff, as do the various stages of development, testing and marking. Essentially, the whole thing takes place inside the company. Additionally, all intellectual property rights, technology and machinery belong to the company and remain under its control. It’s an older style model however it does still work well for many companies. Having said that, it can put huge amounts of pressure on employees, and a large amount of further demand on them if the innovative new product is successful going forward.

Open innovative companies however are concerned with looking beyond their own four walls and increasing their innovative potential by actively and strategically using the world around them. They’re also engaged in combining internal and external ideas, technologies, sales channels and strategies to bring their innovative products to life. All sorts of external influences will be factored in to the innovative process, including customers, suppliers, competitors and employees.

Open innovation is also constantly growing, particularly with the progress of new theories and technologies. It places higher value on wisdom from outside sources, and can allow for improvements in a company’s innovative structure and processes.

What's best for my company - open, closed or a mixture of the two?

This essentially depends on your company, its goals and its innovation strategy. It will also typically depend on how complex the innovation is.

Open innovation can bring increased risks if technology is particularly closely linked. For example, external factors outside the company’s control may well come into play, and these could have a negative impact on the whole product range. It can leave product lines open to imitations, making companies feel more secretive about their exploits and therefore more likely perhaps to plump for closed innovation. Additionally, companies operating in particularly competitive markets may wish to take the route of closed innovation so that the company itself benefits most from the innovative new ideas - there’s less risk of the innovation being leaked out to competitors.

Finally, a company will need to decide if their innovation is going to lead to a product, service or process that’s unique. Closed innovation may be preferable when the innovation produces fundamental technological improvements that mean the company will enjoy a substantial advantage in the marketplace. Open innovation however might be more suitable if the innovation process will be ongoing, and where there are benefits to be had through increased cooperation.

Where does research and development (R&D) fit into all this?

A company opting for open innovation doesn’t necessary do away with its R&D development departments. R&D is the force behind the design, development, testing and marketing of in-house innovations and is often hugely beneficial long-term in giving certain companies a competitive edge. However, when innovation is the result of both internal and external sources, R&D still plays a crucial role in the innovation process.

Contact us to discuss any aspect of tax relief for your innovative company

There are a number of state-backed financial schemes designed to assist companies with the cost of innovation, notably R&D Tax Credits and R&D Grants. However, putting together an application for either relief can be a tough process and there are many pitfalls, which is why you should use a highly skilled R&D tax relief firm such as ourselves.

Myriad Associates (developers of the Tax Cloud portal) is on hand to help with every aspect of putting your R&D tax relief claim together. From our initial meeting to crafting the perfect narrative report, right through to completion our team of R&D tax relief specialists and accountants are proud of their 100% success rate in getting Irish businesses the reliefs they deserve.

Why not try out our Tax Cloud portal for businesses and see what you could be owed, or call our Dublin-based team on +353 1 566 2001. Alternatively, please use our contact page and we'll be pleased to get back to you.

Barrie Dowsett, ACMA, GCMA
Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud
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Barrie Dowsett Barrie Dowsett ACMA CGMA Chief Executive Officer
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