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Remember the famed Bell Labs, once a powerful R&D center for the telecommunication equipment company Lucent Technologies? 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 the 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.

Remember Palo Alto Research Center (PARC), which for 30 years has been part of Xerox Corporation? Like their Bell Labs’ peers, the PARC researchers had all the reasons to be proud of their accomplishments. Laser printing, Ethernet, GUI, the computer mouse are just a fraction of what has been conceived and developed at PARC.

But despite receiving lavish R&D investments from the parent company, PARC had failed to create significant value for Xerox and its shareholders.

What unites Bell Labs and PARC? In retrospect, we 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 an eternity, internal R&D has been viewed as a strategic asset and indispensable competitive tool for any large firm. Because internal R&D was expensive, the large and powerful used it as a weapon to protect their market position from the less funded competitors. If you were big, you could innovate and win; if you were small…well, bad luck.

And then, new entrants to the market began showing up en masse. 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 contributed to this trend. First, the abundance of highly-trained people with college and post-graduate degrees, fueled by the increasing internal mobility of the workforce along with the growing inflow of high-quality professionals from abroad. Knowledge and experience have ceased being the exclusive property of a few; they began belonging to “everyone,” prompting the Sun Microsystems co-founder Bill Joy to remark: “No matter who you are, most of the smartest people work for someone else.”

Second, the web and the host of telecommunication technologies have dramatically reduced the cost of starting and running a business. As a result, small and nimble startups have begun relentlessly challenging large and inflexible incumbents.

Finally, the very nature of innovation has changed. Modern innovation occurs at the cross-borders of different disciplines, and no company, no matter how large, can afford hiring researchers from many different fields. Now, the most disruptive innovation 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, Open Innovation: The New Imperative for Creating and Profiting from Technology, 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 be a huge mistake, however, to think that the end of “closed innovation” means the end of internal R&D. Quite to the contrary: internal R&D will play a crucial role in any firm’s innovation process. What has changed, though, is that internal R&D has stopped being closed innovation; it is now internal innovation.

I like to argue 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 organically connected to the other side that is utilizing the innovation potential of the company’s employees.

In many respects, it’s internal innovation, not open, that represents the foundation of the corporate innovation strategy. Only internal innovation teams can identify and properly formulate problems facing the firms. Only internal innovation teams can fully understand the value of incoming external solutions to select those that make corporate sense. Only internal innovation teams can ensure the successful integration of external information with the knowledge available in-house.

It’s only at this special midpoint of the problem-solving process — at the stage of generating potential solutions to the problem — that open innovation is superior to internal.

Firms, 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

Some firms 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 firm.

First, IINs provide a communication platform between different corporate units that in many firms 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 any large firm with many units spread around the globe can certainly appreciate.

Second, IINs help foster the culture of collaboration, bringing together corporate units traditionally involved in the innovation process, such as R&D and Marketing, with those that not (Business Development, Finance, Legal, etc.).

It’s useful to remember that the notorious “Not-Invented-Here Syndrome” manifests not only as a rejection of external knowledge and expertise but also as resistance to intra-company collaboration, when 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 firm.

Third, IINs can be used to find solutions to problems individual units have failed to solve on their own. Again, such problem-solving could be especially effective 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.

Finally, IINs help identify the firm’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 firm. Besides, the very format of online communication is especially attractive to younger workers playing an increasingly important role in the global marketplace.

In summary, when developing a viable corporate innovation strategy, firms must create a balanced portfolio of internal and external/open 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 firms.

Or, putting this differently, the power of corporate innovation comes from the strength within.