Advancing your business model with open innovation
Open Business Models: How to Thrive in the New Innovation Landscape by Henry Chesbrough
Innovation thrives in an open environment and benefits from collaboration. Closing off technology, product, or service development from the outside world decreases the creative opportunities and limits leaps of innovation. Author Henry Chesbrough promotes an open innovation model which expands both the number of incoming idea pathways as well as the number of go to market avenues. Open Business Models extends this principle to business model design. An open business model supports exchange of intellectual property and broadens the opportunity horizon for capturing value from current assets. Expanding your business model to create a more permeable operating environment allows companies to take advantage of opportunities offered by open innovation.
In this video, Chesbrough discusses the concepts behind open innovation including approaches in use by Intel, IBM, and Proctor & Gamble. Open innovation is a foundational concept underlying open business models.
Below, Chesbrough describes the ideas behind his most recent book “Open Service Innovation” which extends the concept of open innovation into service design.
What open innovation has come to mean as a term is that companies need to make much greater use of external ideas and technologies in their own business and let unused internal ideas and technologies go outside to be used by other companies businesses.
The prevailing wisdom at the time was: if you want something done right, do it yourself. The way that you win now is through collaboration, through sharing…your competitive advantage now comes from having more people working with you than anyone else.
Different companies possess different skills and resources and different positions within the value chain. These differences cause companies to evaluate opportunities differently. Companies will quickly recognize ideas that fit the pattern that has proved successful for them before. But they will struggle with ideas that require a very different configuration of assets, resources, and positions to be successful. With intermediate markets, ideas can flow out of places where they do not fit and find homes in companies where they fit better.
In intermediate markets an upstream company licenses its technologies, intellectual property, or other assets to downstream companies which are adept at development and production. Each member of a value chain contributes a different element to the production of the final end product. This approach has obvious risks, not the least of which is loss of intellectual property, but Chesbrough argues that the upside outweighs the potential downside. He believes that the gains from taking an open stance with respect to innovation and business models allows a company to create a sustainable competitive advantage.
Among the barriers to adopting a more open business model is a company’s inability to see beyond its current business model. Companies often believe that if they cannot commercialize an idea, then nobody can.
There is no inherent value in technology per se. The value is determined instead by the business model used to bring it to market. The same technology taken to market through two different business models will yield different amounts of value. An inferior technology with a better business model will often trump a better technology commercialized through an inferior business model.
Chesbrough defines a business model as serving these functions:
- Articulating your value proposition
- Identifying the market segment
- Defining the structure of the value chain required to create and distribute the offering
- Specifying the revenue generating mechanism
- Describing the position of the firm within the value network
- Formulating the competitive strategy by which the innovating firm will gain and hold an advantage over rivals
Chesbrough situates business models on a spectrum of openness and uses a business model framework with two dimensions (depth of investment made to support the business model, openness of the business model) to illustrated a progression from closed to open. The goal is, of course, to reach the highest level of openness and adaptability.
His business model spectrum begins with an undifferentiated type and culminates in a highly collaborative and adaptive type:
An undifferentiated business model – This is exemplified by a commodity business which is easily copied and competes on few defensible dimensions.
Some differentiation in the business model – This type of business “has escaped, at least for a while, the commodity trap that imperils the type 1 firms.” The primary focus of this type of company is execution; innovation is ad hoc. Intellectual property may be created and sometimes defended by the company, but IP management is “reactive and haphazard.” This is the domain of “one hit wonders” and many technology startups–they do not come up with a second generation product.
A segmented business model – These companies have a business model which serves multiple customer segments, for instance price-sensitive and performance. “The company relies on its business model to select useful outcomes for its internal research and development activities and commercializes those outcomes through its business model.” Innovation is no longer random and there are now road maps supported by schedules and budgets. IP management is now somebody’s job and corporate functional areas outside research and development are part of the innovation process. Although input from customers and suppliers is solicited, opportunities are viewed as products or technologies only.
An externally aware business model – This is a key stepping stone on the way to a fully open business model. New customer segments become available through market expansion because the business model can support new opportunities. Road maps are shared with suppliers and customers. This type of company still focuses on current and adjacent market opportunities and is at risk/unprotected from innovation which occurs in seemingly unrelated areas. Internal innovation efforts are now cross-functional: marketing is involved, full business cases are created and evaluated by finance. Budgets for IP are created. Mature research and development firms are examples of this type.
Innovation integrated with the company’s business model – Innovation road maps are shared with external parties and the company receives road maps from partners. The company’s business model is focused on new market and business opportunities. Alignment of the company’s business model with suppliers and customers is a critical success factor. Intellectual property is managed as a corporate asset.
Company’s business model is able to change and is changed by the market – Examples of this most highly evolved business model include companies like Intel, Wal-Mart, and Dell who shape markets through their platforms. These type of companies have highly interconnected business models focused on entire ecosystems. Innovating the business model is an explicit goal of the company. Risk and reward are shared with external partners. IP is now managed as a strategic asset and innovation management permeates all corporate functions.
The goal is to become progressive more open and to extract more value from corporate IP through an “IP-enabled” business model. To illustrate the available opportunities, Chesbrough describes three types of firms that play key roles in the open innovation / open business model ecosystem: pure play IP-based companies such as Qualcomm, Intellectual Ventures, and UTEK (now called Innovaro); innovation intermediaries like Innocentive, InnovationXchange, and Ocean Tomo; and firms with open business models like IBM, Proctor & Gamble, and Air Products. Chesbrough notes the many challenges with this destination, primarily the difficulty of exchanging IP in intermediary markets. In intermediary markets the value proposition of IP is not clear because the buyer must commercialize the technology and bring it to market. A second key risk is that by describing a technology to the extent required by a customer to purchase it in the form of IP, you risk disclosing the entirety of the innovation and thus losing its value. Taking into account all the challenges and risks, this book presents an intriguing look at the opportunities for value exchange outside traditional products and services.