It is a core strategic choice.
When we’re growing a business, we need to answer an essential question early on: should the asset we’re building the company around be proprietary or an open system?
In other words, do we want our products and services to operate within an exclusive ecosystem we control, or do we want to remain open to interfacing with products and services developed by others, including our competitors?
We can find examples of both approaches everywhere we look.
Take the world of HVAC manufacturers. I worked with a company that built a proprietary system in which the wiring, controller, and other equipment would only work together if they were from this brand. The strategy behind that decision was to lock their customers into buying service and maintenance contracts from them. Customers were hesitant to commit because it was a long-term decision. Open systems offer flexibility and reduce the risk of commitment.
You could also look at the world of phone chargers. Remember when Apple had its proprietary cord that only worked with Apple phones, and nothing else? And then they could change it; you’d have to reinvest in a whole new set of cords. That drove billions of dollars in revenue for Apple and its partners. But that’s since changed, as Apple has been forced to use a more universal charging cable for its devices.
This idea also applies to service-based businesses. I once worked with a networking organization run by an individual who sold products and services to his group. When he started, he could open his network to other vendors so they could sell to his customers. But he opted to go the other way and closed his group off.
The point is that there are many solid reasons to build proprietary systems and products. That’s why many entrepreneurs default to taking this approach. But there is also a downside you might overlook—and open systems might offer more of an upside when you want to scale a business rapidly.
Let me explain.
The Downside of Closed Systems
The benefits of building a closed system are apparent. You can gain access to customers through a monopolistic approach, excluding them from competitors. If you offer genuine value to your customers, you can make switching to another option too expensive. Because you have a captive customer base, closed systems can also shorten the timeline to realizing a return on the investment you made to create them.
Closed systems operate from a scarcity mindset; open systems embrace an abundance mindset. You can think of it like a fishing pond. In a closed system, you limit the number of people who can fish in your pond. But in an open system, you invite anyone and everyone to fish. You focus on scaling up your operation rather than extracting more revenue from a limited customer set in the closed pond.
Businesses built on open systems prioritize growth rates because they attract new customers who can more easily adopt and use their products or services.
Remember the business networking entrepreneur I mentioned earlier who chose to close off his “fishing pond” of customers? He quickly realized how hard it was to grow his business because he had to recruit new members himself and had chosen not to let others fish in his pond. By cutting off other suppliers who would have been eager to sell to his customers—think bankers, wealth managers, etc.—he also lost the opportunity to leverage those partners to help grow the people inside his network.
The Upside of Open
Now, think about how a business that embraced an open systems approach could scale much faster.
Consider how quickly open-source software, where multiple contributors maintain its code, can scale. A prime example is the Linux operating system, which is now used worldwide. Not only has Linux proven to adapt quickly to changing needs because of the wide variety of contributors to its codebase, but it’s also less prone to security vulnerabilities that could hinder a closed, proprietary system. Open systems are critical when developing a market, as you want others to enter to validate the customers and the need.
There’s also the case of that HVAC company I mentioned earlier. While they originally built the business with a closed system, they understood how difficult it was to grow quickly because of that decision. They pivoted and changed their business model to work on any HVAC system a customer needed. That created new growth opportunities across multiple areas, enabling the business to scale.
So, when you’re considering whether to embrace a closed or open approach to your business, consider how big you want your fishing pond to be. If you’re going to scale, consider an open approach more deeply.
