European Scientific Journal December 2013 /SPECIAL/ edition vol.

1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431

OPEN INNOVATION AS A STRATEGIC MODEL OF

MODERN BUSINESS

Nataliia Revutska, Assistant Prof.

Taras Shevchenko National University of Kyiv, Ukraine

Abstract
The paper considers the characteristics of two models of innovation management in
business: a “closed” and “open” innovation models. The traditional model of closed
innovation suggests that it is created, used and developed within one company. The company
concentrates all innovation processes within business, oversees its implementation and uses
the results of own research and development. Formation and development of a knowledge-
based economy requires shifting to a model of “open” innovation. This is due to the need of
involvement in the process of new knowledge creating a wide range of professionals,
academics and research centers from different countries and areas. Therefore, the possibility
to organize a full cycle of innovation within a company is becoming increasingly difficult in
an environment where innovation life cycle is reduced. Companies with “open” innovation
transfer innovative processes to professional research laboratories, research centers and
independent scholars. Inside the company stays a development department whose main task is
the selection of the most promising start-ups, research proposals and their rapid
commercialization. The concentration of innovation efforts of different participants of
innovation chain development, the creation of conditions for the rapid completion of all stages
of the invention into production will ensure successful development of “open” innovation
model in the long term.

Keywords: Business model, open innovation, strategic alliances, outsourcing

Introduction:
The basis for the formation of a sustainable competitive advantage in business today is
the need of effective innovation management and its transformation into a valuable market
resource. In particular, the role of this strategic resource is increasing in the “knowledge”
economy. However, the key problem of “knowledge” economy is not only the creation of new
knowledge but also their applications in business. The processes of innovation management
include concerted action of creation, protection, distribution and use of knowledge. It is
necessary to choose an optimal model of innovation strategic management in modern
business. The relevance of this problem is also related to the attraction of business to use
partners’ forms of interaction. Complementary effect from such interaction is best developed
in the management of innovation. The experience of business in recent years shows that it is
difficult to hold leadership for long period of time only because of uniqueness and innovation
that has only internal origin. Therefore, a change in the vector direction of internal (between
different business units) and external (between the company and other contractors) knowledge
transfer is observed. However, in some areas the external partners (customers, suppliers,
competitors, etc.) can act as a valuable source of new knowledge generating that can be the
basis for innovation.
To ensure effective functioning and sustainability of company growth, it is necessary to
reduce the main stages of the innovation process: an innovative idea - the commercialization

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of new products - investments in perspective radical innovation. At the same time, new forms
of synergetic interaction between business, research centers and individual researchers appear.
In particular, the spread of the global outsourcing model led to the increase of service and
components providers’ role not only as performers but also as co-innovators [1].
The purpose of this paper is to study the basic elements of the open innovation
business model as the strategic perspectives of modern business.
Each company has its own characteristic of knowledge and innovation management
model taking into account the specifics of its activities, the scale of production, organizational
characteristics and corporate culture. In recent years there have been significant changes in
the technology of forming a new model for managing innovation.
The traditional model of the research and development (R & D) departments has been the
most common for a long time. The company attracted leading experts, engineers and
researchers who carried out a complete closed cycle of research and development processes.
Thus, the characteristic of the traditional model of innovation management was that they are
created, used and developed within a single company. This model of innovation management
was effective because the company could concentrate all processes within business, monitor
its implementation, and use the results of their own research and development. Schematic
model of closed innovation is shown in Fig. 1.
But over time, the functioning of R & D departments has led to rapid growth of
company’s costs, while the output is not always possible to commercialize. In addition, the
cost of new projects is significantly increased and their life cycle is much reduced. The need
to attract new professionals resulted in enlargement of business as only big and thriving
companies can afford powerful R & D. But gradually the company faced the situation that
massive R & D budgets of technological leaders are not a panacea for the appearance of an
ambitious “newcomers” who, not having the same resources and personnel, are gaining
significant market share.
Innovative
Selection of profitable
innovative projects

ideas
Development
Commercialization
Intellectual of selected Market
of innovation
property
projects
New
technologies

RESEARCH DEVELOPMENT NEW PRODUCTS

Fig. 1. Scheme of “closed” innovation business model(Compiled by the author based on [2])

In practice, there have been appearing companies, which in a short time by

implementing a fundamentally different model of innovation, have gained leadership, and
have formed a new group of knowledge economy’s company. A striking example of the
successful implementation of this model is the company Cisco Systems, which, having its
own R & D department for a short time managed to oust the market leader of network
equipment - Lucent Technologies Company. Managers of Cisco Systems formed a new model
of knowledge and innovation management - open to the outside market. The company buys at

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the market a result of development in the industry and invests significant financial resources
in promising start-up projects. Cisco Systems has in its structure a department of acquisitions
& development which ensures the open innovation model of the company.
Thus, in the last 10-15 years, knowledge management model that was based on the internal
research and development department transformed a full cycle into an open model of
knowledge management and innovation. Its feature is that the company delivered professional
processes to research laboratories, research centers and independent specialists. Inside the
company there is the development department whose main task is the selection of the most
promising start-ups and research proposals and their rapid commercialization. American
researcher H. Chesbrough called this model as “open innovation” [2].
The model of knowledge management which corresponds to the concept of “open
innovation” is characterized by two-level direction: internal vector involves bringing the
company promising technologies from external developers and external – selling on market
the results of corporate R & D in the form of start-ups, the rights to technological
developments, which for any reasons are not claimed by the company (Fig. 2).
Internal research
base Technological spin- New
offs, startups markets

Innovative
Selection of profitable
innovative projects

ideas
Development
Intellectual Commercialization Existing
of selected of innovation market
property
projects
New
technologies

External research Involving external technology (outsourcing

base and insourcing)

RESEARCH DEVELOPMENT NEW PRODUCTS

Fig. 2. Scheme of “open” innovation business model(Compiled by the author based on [2])

One of the tools of the open innovation model introduction is the use of Internet
technologies. In particular, the practical realization of such a model is undertaken by Procter
& Gamble. The company works with more than 1.5 million researchers worldwide through
Internet communications except 9000 staff in research and development inside the company.
It provided increased productivity of the company by 60%. The company organized and
operates connect & develop department (“connection” means to work together to create new
products with customers, distributors and other parties [3].

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Another example of innovation openness is the acquisition by Facebook an image

sharing application Instagram. The increased activity of users in the exchange of photos
showed that the competition from other image-oriented social networking sites is increased.
The growing dissatisfaction of the most users of Facebook mobile versions requires to search
a quick solution to this problem. The acquisition of Instagram has allowed Facebook to save
time and enhance competitive position without the need to independently develop similar
application. Innovation through acquisition quickly get a tangible result.
The principle of strategic interaction as an external vector of new innovation
management model involves “open” process of research and development, creation and
promotion of the common market innovative products and technologies on the basis of
interaction with its external contractors: suppliers, customers, competitors, innovation
intermediaries and other innovative oriented business entities associated with it horizontally.
There is a whole community of scientists and amateurs called InnoCentive. It brings
together more than 160 thousand talents, helping corporations around the world.
Companies like Boeing, DuPont and Procter & Gamble publish on community pages tasks
and issues that cannot be decided by their internal services, and any of its member or group of
members can take up their decisions. The fee for a successful amateur decided task ranges
from $ 10,000 to $ 100,000. According to statistics, more than 30% of the proposed tasks
have been solved by the community. It is one-third of those tasks that could not be handled by
the internal experts, with their experience and special education [3].
An example of such competitions in Ukraine is “Innovation Breakthrough 2013”. Its
mission is to promote the development of innovative activity in Ukraine, to unite interests of
investors, inventors and enterprisers for the successful implementation of new products and
services. The aim of the contest is to increase the economic effectiveness of the business
fields through the introduction of innovative ideas to Ukrainian investors [4].
In conditions of modern business almost no one can be successful and prosperous
individually and independently. Knowledge, skills, innovation and professional staff are
spread around the world. Experts are divided on many, often little-known tech companies or
start-ups. In order that the company can be successful in the creation and commercialization
of innovations, it is necessary to know and be able to use these global resources, narrowly
specialized skills and widely encyclopedic knowledge, to be a functional part of the
community for an open and a new process.
Comparative characteristics of “open” and “closed” models of knowledge management
are given in Table 1.
Table 1Comparison of “closed” and “open” models of innovation management
Source of Business function Closed model Open model
knowledge
generation and
innovation
Internal Human capital management Attracting the best Permanent staff develops
talents in the business. and selects startups. The
Creation of internal results of research are
research and acquired on the internal
development. market or company
involve the best
specialists for them on a
competitive basis.
R&D management Closed and full cycle Short cycle
“research-development- “development –
implementation implementation
(commercialization)”. (commercialization)”.
Involving knowledge of
high value from the
external market.

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Business competitiveness Owning of the research Market leadership

management and development result ensured the selection of
ensures primacy in the promising start-ups and
market for a long time their rapid
period. commercialization.
Leadership in Leadership in results
innovation provides innovation value
leadership in the market. provides leadership in
the market.
Intellectual property Strict control over Open operations with
management intellectual property and intellectual property and
legal rights on it. rights on it. Generating
new knowledge on the
base of use of
intellectual property by
other companies.
External Relationships management Vertical cooperation Horizontal cooperation
with major research of different partners with
centers and laboratories. modern Internet
instruments.

An important condition for effective implementation of cooperation in the field of

knowledge management is the infrastructural support of innovation. The elements of this
infrastructure include:
- Innovation intermediaries;
- Centers for development of new products and technologies;
- Elements of financial support for innovation (venture capital funds);
- Coordinator of innovation (incubators);
- Advisory and educational centers.
An important tool for effective functioning of “open” innovation model is patent
protection. Besides the fact that it is a legal instrument, patent protection becomes a powerful
source of cash flow generation of innovation rents in “open” business model.
According to the World Intellectual Property Organization (WIPO), profits of
companies owning many patents, in average of 5-8% are higher than the profit of resource
concerns. For example, in 2012, the largest healthcare company Novartis AG earned more
than $ 4.9 billion on patent royalties, that is nearly a third of its budget.
Almost all large companies in developed countries (IT-sector, medicine, telecom - that is
knowledge-intensive areas) try to transfer the assets in the sphere of intellectual property. For
example, at the end of 2012, the Intel Corp declared about willingness to spend one and a half
times more on invention and innovation to increase the share of intellectual property by 65%
of all assets [5].
Formaction of open innovation models in business is positive for the economy in
general, as it provides the positive process of modern and innovative technology transfer on
the domestic market.
According to analysts of the European Commission, the gap between countries that
have made a bet on innovation and resource-dependent countries will grow. The European
Commission believes that by 2050 year such counties will be completely outside of the
modern progress. In the past few years, competition around new technologies has escalated.
Asian economies, led by China will try to catch up with developed countries in the area of
innovation. In 2011, China registered 1.63 million patents, increasing this index for 2012 by
33 %. At this rate China will overtake the U.S. in the number of inventions already in 2025
[5].
The developed countries are trying to retain the intellectual leadership. In 2012, when
the U.S. and the EU have begun to publish the doctrine of innovative development, it became

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clear that the main source of funding is shifted toward the formation of research centers.
In the United States is planned to establish scientific conglomerates that combine a whole
regions and institutions in the same network. In the EU is planed to strengthen the financing
of individual universities and organize them on the basis of the experimental laboratory.
It is the concentration of innovative efforts of different participants in the innovation process
and creating the conditions for the rapid completion of all stages of the invention to produce
and ensure successful development model of open innovation in the long term .

Conclusion:
The processes of creation and functioning of a modern knowledge economy cause the
appearance of new knowledge management models of innovation. The transformation of
companies in the open innovation business model is perspective from the standpoint of
strategic development. They benefit from the rapid commercialization of their ideas and are
able to enhance their experience through the dissemination of these innovations, among other
companies in the market (startups and spin-offs). They also can obtain economic benefits
from innovation rents due to patent protection and sales licenses.
The business model of “open” innovation in Ukrainian business has great prospects in the
field of pharmacology, chemistry and other areas where companies are able to produce
innovative ideas which development is possible through direct market entry. Exactly foreign
market should be a source of creative ideas, developments and offers, saving financial
resources for the company. In addition, the model of “open innovation” provides the
functioning of advanced outsourcing market. University education centers play an important
role in the process of open innovation models creation; those centers may be involved in the
chain of formation and commercialization of knowledge and innovation.

References:
Snyezhko Е. Zakaznoi biznes, publication in «Investgazeta» № 49 on 17 December 2012.
Chesbrough H. Otkritie biznes-modeli. IP Management / Per. s angl. V.N. Yegorova. - M.:
Pokolenie.- 2008. – 352 p.
Mamontov A. Ot kraudsorsinga k prosyumingu.
http://www.companion.ua/articles/content?id=211880
Official site of Ukrainian Contest «Innovation Breakthrough 2013» // Electronic resource:
http://ukrinnovation.com/ukr/partner.htm
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