Open Innovation: The New Imperative for Creating and Profiting from Technology

    By: John Richmond on Sep 17, 2013

    Book Review: Open Innovation: The New Imperative for Creating and Profiting from TechnologyCode

     By: Henry Chesbrough. Boston, MA: Harvard Business School Press, 2003. 227+xxxi pages. $35.00.      

    A decade or two ago, companies generally developed all portions of their product internally, but the trend more recently has been toward many variations of codevelopment. For example, a supplier might develop a complete subsystem (especially in the automotive industry), or a product development firm develops all or most of the product. In electronics, it is becoming popular for a supplier both to develop and to manufacture the product.

    Henry Chesbrough tackles a small but important portion of this external development: obtaining or providing—from the outside—the ideas or technology incorporated in the product or its manufacturing process. This is much narrower than innovation, which normally refers to the complete process of bringing an idea or technology to market. Thus, this book more accurately might be titled Open Technology.

    Open Innovation will be enlightening for anyone interested in managing the technologies used in products or their manufacturing processes, especially in technology-intensive businesses. Although its focus is on technology, it also provides valuable insights that can be generalized sharing other parts of innovation across organizational boundaries, so this book—with appropriate reinterpretation—becomes a good reference for codevelopment in general. Chesbrough writes from the perspective of the large company, but his material applies to any size firm, especially very small or startup firms that must look outside for technology by necessity.

    This book contrasts an older model of closed “innovation,” exemplified by strongly vertically integrated companies such as General Motors, IBM, and Xerox, in which technology is developed internally and is prohibited from going outside to a newer model of open innovation that encourages the flow of technology both into and out of the firm.

    In contrast with many other books by business school professors, this one is not based on a broad survey and statistical analysis. Instead, Chesbrough provides several detailed case studies and weaves them together with his commentary on the principles involved. He presents many interesting examples, including Lucent, Procter & Gamble, Millennium Pharmaceuticals, Adobe, and 3Com.

    Open Innovation opens with a chapter on Xerox's Palo Alto Research Center (PARC), which has been cited often as a poor example of technology management. But Chesbrough looks deeper and divides PARC's technology into two types. Technologies applying to Xerox's core business of copiers and printers, indeed, have been managed effectively. However, Xerox established PARC to move into the computer business, and most of PARC's technology therefore was focused on computers. The computer technologies have been problematic, not because of the technologies themselves but because Xerox could not provide effective business models for them.

    Chesbrough's main thesis is that a technology's commercial value depends mainly on its associated business model, and without an effective business model, the technology has no commercial value. In Xerox's case, it has a deeply established corporate business model, starting with its pioneer Model 914 copier. Some characteristics of this business model are that the product is leased (not sold) and is serviced only by Xerox personnel, and its technologies are developed entirely internally and are protected from external use. Because this business model was entrenched so strongly, Xerox was incapable of formulating the alternative business models that would make PARC's computer technologies successful. These technologies had to leave PARC, often with PARC's more entrepreneurial employees and Xerox's blessing, in order to find a business model that fit them. Two such PARC technologies are Ethernet, which spawned 3Com, and PostScript, which became the foundation of Adobe.

    This book is organized nicely. Chapter 1 sets the stage by using PARC to illustrate key points. Chapter 2 shows how closed innovation started in the early twentieth century with the powerful corporate research laboratories of GE, GM, IBM, AT&T, and RCA and it shows how this era eroded in the late twentieth century, due mainly to employees becoming more mobile and the rise of venture capital, which together provided external options for ideas laying on the shelves of the corporate research labs.

    To provide contrast and continue the story, chapter 3 describes open innovation in terms of a new logic: “Instead of making money by hoarding technology for your own use, you make money by leveraging multiple paths to market for your technology. Instead of restricting the research function exclusively to inventing new knowledge, good research practice also includes accessing and integrating external knowledge” (p. 52).

    Chapter 4 is the core of the book, as it covers business models. A business model has six objectives:

    • Articulate the value proposition, which is the means by which the product will create customer value.
    • Specify the target market segment.
    • Define the value chain for distributing and servicing the product.
    • Using the market segment and value chain information, formulate the cost structure and target margins desired.
    • Describe how the product fits with suppliers, customers, partners, and others in its value chain.
    • Determine a competitive strategy by which the product will build an advantage over others.

    Chesbrough believes so strongly in the importance of business models that he claims an inferior technology with a better business model often can beat a better technology with an inferior business model, and he offers a comparison between the Xerox Star computer and the IBM PC as an illustration of this. Whereas large corporations usually value sticking to their business models and improving them, venture capital firms succeed by consciously trying out different business models until they find one that works.

    Chapters 5 through 7 each provide a case study illustrating a facet of open innovation. Chapter 5 shows how IBM moved from the closed innovation paradigm to the open innovation one, going through a “near-death” experience in the transition. In disc drives, for example, IBM abandoned a highly proprietary position in which they only would supply drives as a part of their computers and instead started selling drives to direct competitors of their notebook computers. Chapter 6 covers Intel's sophisticated open innovation approaches that have been refined from the company's founding principles. One such approach is Intel Capital, in which the company invests in startup companies developing technologies in which they might have an interest, both as an investment and to learn firsthand about the technologies. Chapter 7 describes a new ventures group at Lucent which was highly successful by most measures in selling technologies for which Lucent had not established an application. Unfortunately, this group eventually succumbed to the corporate immune system.

    Chapter 8 addresses patents, licensing, and royalties connected with technology that moves between firms. The philosophy for managing such intellectual property differs greatly between open innovation and closed innovation. Chesbrough advises that an organization's intellectual property strategy should reinforce its business models. A fascinating case study here shows how Millennium Pharmaceuticals licenses only the portion of a given technology for which the customer has a commercially effective use, retaining other rights to that technology so that they can sell them to another firm having a business model that fits those rights better. In reference to the six bullets above, Millennium distinguished based on market segment. Typically, each drug company has specific diseases that it pursues, so, for example, a given drug company might have a high interest in a gene or protein to fight obesity but be far less interested in the same gene or protein for applications against cardiovascular disease.

    Chapter 9, “Making the Transition,” is the most directly useful one, especially for the book's target audience of managers wishing to move from closed to open innovation. Here Chesbrough offers a rich selection of advice, one item of which is to define and to communicate your organization's business model, much as managers often are advised to do with their mission statements. He also cautions that, even with open innovation, a company still needs a strong internal research and development (R&D) capability to understand the technologies arising externally and to be able to integrate them, even if they do no internal technology development. Although external ideas and technologies are valuable for creating value for your company, do not rely on them to claim value for your organization.

    Although this is a book concentrating on technology as it is related to business and not about innovation as a process (customer research, design, testing, etc.), the thoughtful innovation manager can learn much from it about managing many nontechnology portions of innovation in this era of expanding codevelopment.

    Preston G. Smith, CMCNew Product Dynamics

    Released: September 17, 2013, 1:58 pm | Updated: September 17, 2013, 1:59 pm
    Keywords: PDMA Blog

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