Business Models and Innovation Literature Review

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Innovation Models Lead to a Sustainable Business -- Closed vs. Open Innovation

Following the introduction of the concept of open innovation, the exploration in the area has increased significantly. Open innovation involves the utilization of purposive knowledge inflows and outflows to help in the acceleration of internal innovation and the expansion of external markets for innovation. On the other hand, closed innovation refers to a situation where every activity is carried out within the organization and for the benefit of the organization. There are strong arguments for both approaches.

The Shift from Closed to Open

Innovation previously adopted a linear view where the focus was on science and tended to favour 'closed' systems. This approach would later be replaced by a more interactive and 'open' model that was grounded on continuous education and learning for all participating parties. The evolution and constant changes in the micro and macro environment produces products and processes as well as innovation (Marques, 2014). There was need to adopt a more nuanced approach that focused on the immediate needs of managers, the comparative choices they had when making decisions and an emphasis on an open model rather than a closed model (Felin & Zenger, 2014). Those who push for open innovation tend to lean towards universal prescriptions and proposals while research shows that the mechanisms open innovation employs and the results it achieves are always highly sensitive to contingency and context. This is not unexpected, as history shows that both closed and open natures of innovation are contingent and do not consist of merely a simple change from closed innovation to open innovation as has been suggested by various sections of literature. Research indicates that innovation patters vary fundamentally -- by firm, strategy and sector. It is therefore essential to look at the mechanisms that aid the generation of successful innovations in both closed and open systems (Tidd, 2013).

Traditionally, established organizations relied heavily on their Research and Development departments and were in favour of innovation approach that protected all innovations firmly under the control of the firm. The open model is new way of thinking and drives new paradigms on how organizations can benefit from innovation. As opposed to closed innovation, firms are actively encouraged to utilize knowledge outflows and inflows to speed up internal innovation and to expand their market territories. This reality has led to the rise in popularity of the concept of open innovation with both SMEs and large firms (Brunswicker & Ehrenmann, 2013).

One of the reasons for the rising popularity of open innovation is because it fits well with the tendency of firms today to work outside of their traditional operational boundaries. Much of the research in the area have been directed at manufacturing organizations and very little attention has been given to service businesses in spite of the big portion of the economy they control. An analysis of UK companies reveals the following. The use of innovation by firms tends to increase with increase in the size of the firm and the size of their R&D department. Service businesses tend to 'open' innovate more than their manufacturing counterparts and they place more emphasis on technical and scientific knowledge than they do so on market knowledge. Open innovation has also been linked to the uptake of service inclusive business models among manufacturing firms (Mina, et al., 2014).

Open Innovation and Sustainability

Research on open innovation shows that benefits organizations accrue from adopting strategies of open innovation vary. Nonetheless, it is not yet clear why this is the case. A possible reason is that business models of companies are not specifically in tune with open strategies (Saebi & Foss, 2015). The concepts of business models and business model innovation find their grounding in strategic management, industrial economics, and corporate practice. Nonetheless, business models do not constitute a strategy but are the core drivers of strategy and play a role in understanding and decoding as well as effectively communicating what a strategy is all about within the organization's internal and external environment (Sindakis, et al., 2015).

Organizations do not exist in a vacuum and must continually look for new and useful ideas from the external environment. The concept of open innovation allows organizations to do this in a structured manner and so ensure sustainability.. Indeed designers are adopting a concept known as Lean User Experience (Lean UX), which recognizes that customer archetypes are just hypotheses and not facts. Until proven true, customer profiles are to be treated as provisional (Ries, 2011).

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What innovation implies remains to be comprehensively defined. Furthermore, there is great overlap between the concept of open innovation and other concepts such as crowdsourcing, user generation and distributed innovation. While the body of research on open innovation has grown significantly in the recent past, still many contextual issues have not been addressed. Most of the studies have been carried out in the context of developed nations and in large organizations. Open innovation in the developing world and SMEs has still not been adequately studied. Open innovation in SMEs is just starting to gain ground and it is important that managerial issues such as capacity development need to be studied in this context. This is in appreciation of the fact that developing strong internal capabilities is one of the best ways to build a sustainable organization (Hossain, 2013).

Organization Requirements to Handle Open Innovation

In order to maximise the advantages of open innovation, human resource needs to adopt a new paradigm and change the way they deal with technologies, knowledge and ideas. As suggested by research activities that have and continue to contribute to the study of open innovation, organizational culture also needs to be more open to the concept (Herzog & Leker, 2011).

New challenges to management are arising due to increased engagement and openness as well as due to the increase in interactions between organizations. In spite of the increase in significance, many organizations face many challenges in actively managing open innovation processes. Research on large firms reveals that they require internal capabilities that allow them to absorb external knowledge and ideas and derive value from them. Established managerial attitudes and practices on innovation influence how an organization absorbs external ideas and knowledge in a big way. It has been shown that both informal and formal managerial practices are significant in capturing value from openness in small and medium-sized enterprises as innovation represents an organization's ability to search and transform and eventually capitalize on inputs of innovation. Further, formal metrics and procedures for measuring and evaluating innovation performance through the processes of inception all the way to commercialization are very important. Indeed, there is need for high level of discipline among SMEs towards the innovation value chain so that internal and external innovation is integrated successfully. However, creating value from openness and efficiency in the management of innovations is not always enough. There should be strategic coordination, a friendly culture, and adequate financial support (Brunwicker & Ehrenmann, 2013).

Making the shift to open innovation will require firms to induce new managerial structures and practices as pertains to the way open innovation is to be executed. Anecdotal case studies on organizations evolving from closed to open innovation show that such organizations imbibed new managerial capabilities at various managerial levels. Establishing the new capabilities will require firms to undergo organizational change encompassing different phases. However, not much work has been done to understand organizational change in small and medium sized enterprises. Firms should therefore put more effort in developing structures and practices that can allow for effective execution of open innovation (Brunswicker & Ehrenmann, 2013).

Challenges in Open Innovation

While open innovation is considered a huge success is academic circles, very few business organizations have followed suit, and some players think it has a lot of imperfections. The reasons some organizations view open innovation as limiting include (Marques, 2014):

i. It appears to adopt a linear model par excellence which basically consists of variations of 'stage-gate' model, with a funnel that allows exchange of ideas throughout the whole linear process.

ii. Knowledge flight is another problem. The view of open innovation is in favour of information sharing but this reality can lead to both flight of sensitive technological and commercial knowledge. There is need for balance to be found between knowledge exchange and control of sensitive knowledge.

iii. The other issue has to do with opening knowledge pathways and taking lessons from the global economy, a reality that led organizations like Philips and Proctor & Gamble to find internal frontiers that limit free information flow between departments. If this is the case then the model certainly has unexplained problems.

iv. Another problem is about the huge influence customers and the market has on innovation sources. There are several factors that have to be considered when talking about process, market, process and organizational innovation.

Adopting Open Innovation

Firms are now joining forces in sophisticated regional innovation networks or spinoff/start-up ecosystems where that encourage open innovation.....

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