Closed Innovation: Internal Development Focus

1.0 Open and Closed Innovation

Innovation can be categorised as either open or closed, as applied in an organization and depending on the way in which it is created. Closed innovation occurs in a restricted environment such as that of a company (Lynch, 2018). In this type of innovation, it takes place exclusively within the company without external input. The rationale is that innovation is an internal affair that should only be developed by the company itself. Therefore it takes place within the confines of the organization so that its technology, intellectual property, processes and know how remain under its control. Closed innovation is characterised by large investments made by organization into its internal R&D. In such cases, the R&D establishments are responsible for valuable technological inventions that inform innovative products and solutions (Lynch, 2018). There is high demand on employees and the organization will invest in highly qualified and creative employees for their internal R&D activities. Some organizations will prefer closed innovation since they want to stay ahead of their competitors by offering the best ideas and being the first in the market. Apple Inc. has been using the closed innovation model at the initial stages of design and production, especially the software part.

On the other hand, open innovation is defined as a ‘paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology’ (Chesbrough, 2003). Open innovation is basically an improvement of the traditional closed innovation in that it is broader and allows organizations to function in a new way. It involves sharing of ideas and working together with the community for commercial and social purposes. Organizations like Coca-Cola have adopted open innovation to allow its customers to suggest new flavours of its products.

1.2 Michael Porter’s Diamond Model for Apple

Porter (1990) put forward the theory of National Competitive Advantage of Industries to explain why certain industries in given nations are competitive globally as opposed to others. He therefore put forward reasons such as location advantages to explain the phenomena. These conditions include: firm strategy, structure and rivalry; factor conditions, demand conditions; and related and supporting industries. The above four conditions will push the local organizations to continuously innovate and upgrade, if they are favourable (Porter, 1990). Eventually, such local organizations can compete in the international stage.

1.2.1 Firm Strategy, Structure and Rivalry

The concept of firm strategy, structure and rivalry reflects how hard it is for organizations to survive domestically due to the stiff competition. However, firms that are able to pass the test of rigorous competition, will be able to compete easily at the global stage because they are hardened from local competition. Rivalry among organizations like Apple, Google, Microsoft and other technology companies mostly from the Silicon Valley, has led to improved and better quality in products such that Apple’s products take a superior position at the international market stage (Smith, 2010).

1.2.2 Factor Conditions

Factor conditions in a given country refer to the human, capital and natural resources unique to and available (Porter, 1990). While some countries may be rich in minerals like Saudi Arabia, the USA is rich in the most skilled and innovative IT workforce in the world. Additionally, some of the best educational institutions like MIT, Stanford, Caltech and Princeton are found in the US and provide breeding ground for IT enthusiasts. For that reason the Silicon Valley is the melting point of all major technological inventions. Apple and many other tech companies have benefited from the unique factor conditions in the Silicon Valley to become one of the most competitive companies in the world.

1.2.3 Demand Conditions

More than 60% of the US population use smartphones and the demand for desktop and mobile applications is very high (Poushter, 2016). This provides a favourable atmosphere for organizations in the IT sector to manufacture more and better devices to satisfy the appetite in the local market. A case in point is Apple which has adopted the culture of innovation by releasing new models every year. (AFS, 2018) Eventually, such local conditions makes tech companies in the US suitable to compete at the international stage having been capable of satisfying the demanding local market successfully.

1.2.4 Related and Supporting Industries

In the world of manufacturing, companies depend on each other for products and services that are instrumental in completion of their own (Porter, 1990). Companies like Apple are strategically located in the Silicon Valley where numerous tech companies are also situated hence ease of cooperation with related and supporting industries. A company like Qualcomm, which is a leading semiconductor manufacturer, is one of the key suppliers of Apple for multiple electronic components. Apple’s Annual Report indicates that it relies on various suppliers from the Silicon Valley and other countries. (AFS, 2018)

2.0 Localisation and Internationalisation

Localisation is the process of organising business or industries in such a way that their main activities are confined domestically as opposed to international areas. Internationalisation on the other hand, refers to a situation where a firm begins to operate in two or more countries (Wit, 2017). A firm can become internationalised by selling its products to foreign buyers or through selected distributors or agents in a foreign country. Normally, firms have reasons for moving into a foreign market and there must be attendant advantages associated with such a move. It is usually a strategic choice made by the management having analysed their business model with regard to sustained competitive advantage. Managers of organizations have to make strategic moves supported by evidence of profitability for the business. As a business expands its wings into new international markets it has to deal with changes in areas like the educational system, political ideology, legal system, language, behaviour, distribution structures, among other factors (Lasserre, 2018). As a result a manger must be aware of and be conversant with international variety and linkages as key determinant as to whether a business will be situated in a given country. While moving from a localised market to an international one could be lucrative, it is bound to have risks as well. According to Apple’s financial report for 2018, it sells its products on all of the five continents including Asia, Africa, Europe, South America, with America consisting only 42 % of its total sales.

2.1 Merits of internationalisation

Expansion into foreign nations offers MNCs with access to new markets and customers. In light of the above, American firms have been attracted by the populous market in China which was previously closed but now available (Lynch, 2018). Despite the cultural, political and economic differences, American firms continue to set base and expand in China. Additionally, country like America being the largest economy in the world, produce more than it can consume hence the need for manufacturing firms to find market elsewhere. However, before a firm delves into the international market it is important that it gauges its competitive advantage using the resource based model of strategic management. It means that if a firm is already competitive within the local market, it will most likely fair well at the international stage. In order to maximise profits, a firm will strive at all times to lower its operational and production costs. As a result a local firm with intention to expand its customer base may decide to relocate some of its business activities into another country (Wit and Meyer, 2014). This offshoring activity is usually strategic in that the firm will consider the difference in production costs with that of its host country. Countries like China and India are known to offer cheap labour hence are the most preferred destinations for MNCs seeking to cut production costs. A firm that is expanding to a new market will have increased sales volume and strive to reduce its cost of production to maximise its profits (ibid). This approach has been applied by Apple whereby its products are designed in the US but are produced or assembled in China owing to the lower cost of production compared to the host country. For some firms, internationalisation provides an opportunity redistribute their eggs into different baskets located in different countries. Therefore, firms will always attempt to diversify their business risks. This can be done by diversifying the market or suppliers to avert total loss in case of any natural disasters, political or economic risk. A case in point is Toyota that diversified to different countries so much that the 2011 earthquake did not ground its operations (Wit and Meyer, 2014). The same strategy has been adopted by Apple which has different suppliers from different countries to minimise the risk of non-performance.

2.2 Demerits of Internationalisation

Despite the returns that come with internationalisation, sometimes it is preferable that a firm remains localised until it is ready to tackle all the risks that come with venturing beyond borders. Political risks in foreign countries where a firm has established its business supplies, production or market, can negatively affect its operation (Wit, 2017). There are countries experiencing political instability and management of firms will be reluctant to venture into such markets regardless of the profitability. However, there are countries that even though may have a political risk, firms will still invest due to the opportunities inherent in them. A firm operating in another country must be aware of the economic risks associated with the nation’s economic policies and conditions. Using Porter’s Five Forces Model, a firm can assess economic risk among other factors that are likely to affect the business (Grundy, 2006). Variation in economic conditions such as a drastic drop in the currency or inflation or recession in another country will affect the business of a firm. It is for this reason that the executives must approach internationalisation with caution and conduct proper analysis of all factors that affect the business presently and in the future. Additionally, cultural risks can affect a firm's operations in another country, including language to be used, nature of advertisement and product customization.

2.3 Internationalisation as better option for Apple

According to Apple’s Annual Financial Report for 2018, Apple sold only 42% of its products in the US, the remaining percentage was sold in Asia, Europe, South America and Africa (AFS, 2018). This is an indication of an MNC which has already internationalised and benefitting from low cost leadership. In the same report, Apple indicates that it has suppliers from different parts of the world and its production is mainly based in Asia. Expanding into other countries is the best choice for Apple for two reasons. Firstly, it is cheaper to outsource suppliers from other countries and to assemble their products in Asia than it is in the US. Secondly, Apple needs additional markets because they already produce more products than can be consumed in America. Entry into Asian, African and European markets will continue to grant it more consumers, hence more profit at reduced cost if it were to remain localised or delocalized.

3.0 Organisational Purpose, Profitability and Social Responsibility

Every organisation has its mission, vision and objectives which are their guiding pillars towards a particular direction. Organizational purpose is a component of corporate mission and it is the reason for which an organization exists. A direction taken by the firm is a direct result of the perception of its executives with regards to the purpose (Campbell and Tawadey, 1990). Organizational purposes falls at the centre of organizational beliefs, business definition and organizational values. Therefore corporate mission and vision are fundamental because they give direction, legitimization and motivation for employees to work in a certain way. Corporate governance is a subject that is very key with regard to the management of any firm. It is what will guide the strategic choices and actions of the management ensuring that they remain true to the organizational purpose. Tricker (1994) defines corporate governance to mean it is that which addresses the issues facing board of directors. As a consequence corporate governance has something to do with the roles and responsibility of directors and the top management. Essentially, corporate governance is a useful tool in balancing profitability and responsibility of a company. Profitability and responsibility of a firm are often juxtaposed if not paradoxical. In fact there are conflicting views as to the purpose of an organization. This has been brought about by the fact that business organizations exist within a society and the public debate continues to date as the purpose. In this regard, there are those of the view that business organizations should pursue economic profitability as well as social responsibility at the same time (Wit, 2017). Another school of thought maintains that business organizations are created solely to make profits such that the only social responsibility it should pursue is profitability. It follows that there is a conflict between profitability and social responsibility and managers find themselves at crossroads not knowing whether to serve a social purpose of maximise shareholder value.

The demand for economic profitability coincides with the shareholder perspective which supports the view that business organizations must be profitable to survive. According to Rappaport (1986), business organizations are instruments of making money owned by shareholders whose interests must be served. However, this school of thought has been criticised to the extent that when ownership and management are separated, it is possible that the management will act more in self-interest than in shareholders’ interest. Contrastingly, the stakeholder values perspective maintains that there is no justification in individual shareholders making demands from an organization when there several stakeholders with interest in the same entity (Wit, 2017). This perspective requires the management to have regard to the joint interest of all stakeholders but not necessarily maximising shareholder value.

3.1 Balancing the conflicting needs

In light of the foregoing it is clear that the two schools of thought are diametrically opposed. The advocates of stakeholders approach want a system that is responsive to stakeholder interest while those on the shareholder's want a system that prevents the top management from pursuing self-interest at the expense of shareholder value. Interestingly, both perspectives agree on one thing, which is corporate governance as a way of balancing profitability and responsibility. Unfortunately, corporate governance principles are merely persuasive as opposed to binding, hence very weak (Wit, 2017). The most appropriate solution to these conflicting interests for the management is parallel processing. In parallel processing, shareholders are managed by the board at meetings and conferences and production departments deal with environmental issues affecting the society. The finance department manages the tax authorities and other government agencies. In the end, shareholders and various stakeholders are managed at different levels and organizational departments – in a parallel manner. For Apple, it was criticized for a long time for its complacency in enhancing social responsibility. Steve Jobs, while still the CEO and founder, was perceived by many observers to be a proponent of the shareholders' perspective. However, this does not mean that the company did not have corporate social responsibility programs at the time. The issue was that effort placed in social responsibility was not commensurate to its profitability. When Tim Cooke ascended to Executive post, there was a change at Apple. He put additional effort into social responsibility and as of 2018 Apple had achieved its goal of using 100% renewable energy for its operations (Apple Environment Responsibility Report, 2019). Further, the company has cut its carbon footprint by half through initiatives like launching a MacBook Air with 100% recycled aluminium in 2018. It also refurbished 7.8 million devices and recycled over 48,000 metric tons of e-waste in 2018. In terms of giving back to the society, Apple has been investing in girls’ education and empowerment, and marginalized communities through education. Apple has successfully applied the parallel processing as a way of balancing the conflicts and solving the paradox of profitability against social responsibility. Essentially, Apple has adopted an approach that balance shareholders’ interest against other stakeholders’ interest including the society at large. Although Apple cannot be aid to be perfect in its balancing act, it has done a lot in terms of sustainability, transparency, accountability and the need for profitability of the business organization (Apple Environment Responsibility Report, 2019). It is thus a suitable epitome of good strategic management and leadership principles well applied to towards an organisational direction.

4.0 Personal Reflection

This assessment has granted me a deeper insight into MNCs operation in the US. I found out that external innovation is not for every business organization or product. There are organizations that deal in technologies that are the basis of trade secrets and are thus restricted to closed innovation so that it is only the internal R&D department that deals with creative aspects. In this case, Apple operates a closed innovation than an open one owing to the nature of their devices including security preferences. Internationalisation can expand the customer base of an organization, enhance differentiation of risk and reduce costs of production compared to localisation which presents the same in form of risks. Actually, internationalisation is very beneficial for an organisation as long as it is done after the management conducts a resource based analysis to realise a sustained competitive advantage. I realised that the senior management and leadership of a company has a difficult task of ensuring that there is a balance between corporate profitability versus social responsibility. On one hand, there is the interest of shareholders who want value for their money and on the other hand are different stakeholders who want the company to meet certain obligations including moral ones. As a future manager and leader, I must be aware of the different perspectives pertaining to profitability and responsibility. I must also learn to balance the two by applying parallel processing principle. In the end, it is important to know the actual purpose of the organization in order to lead effectively.

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