Strategic Choices: #3 Open vs. Closed System

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Should The Company Pursue an Open or Closed System?

The article, How Smart, Connected Products Are Transforming Competition, published in the November 2014 issue of Harvard Business Review (HBR), identifies the ten strategic choices manufacturers must make to capitalize on IoT opportunities.

Co-Author and PTC CEO Jim Heppelmann explains the third strategic choice, should the company pursue an open or closed system to enable their smart, connected product strategy, and provides a recommendation to get started.

Video Transcript

Open architectures are frequently thought of as being modular, closed or proprietary systems are frequently thought of as integral, and there are benefits of open systems and benefits of closed systems as well.

Open Systems Pros and Cons:

If we think about open systems first of all, they enable a faster rate of overall innovation because an ecosystem of different providers can all contribute to the solution. This, of course, shortens development time and time to market, and it might reduce the ongoing cost of supporting and maintaining the system because the provider doesn't have to take responsibility for each and every component of the system.

However, there're some downsides to open systems. One of which is that it enables other members of this ecosystem to actually compete for large portions of the system and to capture more value than you might be comfortable with. An open system also involves some pretty substantial design trade-offs. Sometimes these interfaces should be thought of as adequate but not fully optimal in terms of how the components work with each other. So ultimately in an open system you're typically sacrificing some level of performance for flexibility.

Closed Systems Pros and Cons:

On the other hand, when we think about closed systems we're talking about systems that enable the company to control and to optimize all the elements of the system so that the system has overall greater performance. This allows for richer capabilities and richer data sources because all of the components can be tuned towards a common goal. If you're fortunate, you might create a system that is so powerful it could become a de facto industry standard, which of course is the best of all.

However, there're some downsides to closed systems. First of all, they require very significant development and investment because you're responsible now for creating and maintaining all of the components even though there may be companies specializing in different elements of what you're trying to do. Closed systems are challenging to defend because customers like the idea of specialization of different components, and they like the option to have choice to pursue different components from different vendors. Of course, if you want to participate in an even larger system, if your system is part of a system of systems, then you almost by definition at some point need to be open or you'll be precluded from playing a role in that larger system.


So our recommendation would be that, realistically in almost every case, some kind of a hybrid approach is required. You should look at what is the functionality where we can generate so much value that we can justify being closed and proprietary, and what is the perimeter that we can defend. I think that perhaps a high-performance appliance should have a control system that's integral or that an autonomous automobile should have a control system that's designed exactly for that automobile.

On the other hand, even a home appliance might be integrated into a home automation system. Or an automobile might participate in a smart city. So at some point, beyond the peripheral that you're going to be able to defend, you're system's going to need to be open so that your solution can play a role in an even bigger solution to avoid that risk of being excluded from such bigger solutions.