Book Review: Open Business Models: How to Thrive in the New Innovation Landscape

    By: PDMA Headquarters on Oct 02, 2013

    Book Review: Open Business Models: How to Thrive in the New Innovation Landscape 

    By: Henry ChesbroughBoston : Harvard Business School Press , 2006 . 256+xvi pages 
    Review by: Mark J. Deck

    In his earlier book, Open Innovation: The New Imperative for Creating and Profiting from TechnologyHenry Chesbrough (2003) coined the term open innovation and opened our eyes to the implications of what his latest book, Open Business Models, calls “the new innovation landscape” (p. i). John Sealy Brown's foreword to Open Innovation characterized the challenge well—the need to innovate our ideas about innovation itself. That foreword prophetically emphasized the need to experiment with business models as well as with innovation.

    Open Innovation made a compelling case for opening up the sources of ideas and technologies in the front end of innovation—most of the world's really smart people are not in your research and development (R&D) department; they are now inherently more accessible, and others will use them if you don't. It also emphasized the need to open up the back-end value outcomes of innovation including licensing, divestiture, and spin-off. The critical connection between front-end sources and back-end outcomes is the business model, and a full chapter was devoted to that topic.

    Open Business Models extends the critical concept put forth in Open Innovation that technologies require appropriate business models to give them value. The core idea is that “companies must develop more open business models if they are to make the most of the opportunities offered by Open Innovation” (p. 107). Chesbrough defines a business model as encompassing the following functions: (1) the articulation of a value proposition and target market segment; (2) definition of a value chain structure and value network position that allows the value proposition to be delivered and differentiated; and (3) an economic model that allows the company to extract sufficient value to succeed. Open business models do not constrain any of these functions to company-owned resources or capabilities. Chesbrough asserts that open innovation can enable or require innovation in the targeted customers, the value proposition, the value chain, the value network position, and the economic model. Much new product development (NPD) literature and mindset focuses on innovating in the first two of these: customers and value proposition. Chesbrough maintains that a company that stops there has what he describes in Chapter 5 as a Type 3 (of 6) business model—with even more value to be captured if desired.

    This book is not an open innovation or alliance management how-to book. It is a strategy book, with depth on innovation strategy and business model strategy. The book is for innovation executives, chief executive officers (CEOs), and chief operating officers (COOs) seeking to innovate innovation.

    Open Business Models is organized in eight chapters that fall into four categories. The first two chapters address the opportunity of open innovation and barriers to achieving it. Chapters 3, 4, and 6 cover intellectual property (IP) management and the changing environment for IP, a strategic element to manage in business model evolution. The fifth and sixth chapters provide details on open business models as well as IP-enabled business models (companies whose business model is built around emerging secondary markets for IP). Chapter 8 is about what it takes to open up business models and draws on three rich case examples. My comments follow, organized by the four categories.

    Under the category of opportunities and barriers, Chapter 1 recaps some of the previous book but provides sharper economic justification for open innovation—there is too much outside the company to ignore, the costs of developing internally continue to rise, and shorter product life cycles force a more rapid pace of innovation. The new twist here is the emergence of intermediate markets for IP and the increased division (specialization) of innovation labor as well as access to it. Chesbrough makes a convincing argument for why opening innovation will be a game changer for most industries. Chapter 2 describes natural corporate barriers to using outside innovation, reasons that developed technology often goes unused, and natural barriers to greater external use of internally developed ideas. A key economic driver for the disuse of internally developed technologies is a budgetary disconnect between R&D,which wants to move on to the next challenge instead of adequately developing a technology past the patent and publication stage,and the business unit,which wants to invest in more well-developed technologies that will provide quicker returns.

    This budgetary disconnect concept is also covered by Chesbrough in Chapter 2 of Chesbrough, Vanhaverbeke, and West (2006). This is a more theoretical view of open innovation comprising conceptual papers and original empirical studies. Those with a research interest in open innovation will probably find this book a valuable companion, especially for its treatment of IP and public policy as well as innovation in networks of companies. It also includes a chapter that reconciles the open innovation constructs with the radical innovation framework being developed at Rensselaer Polytechnic Institute by Gina O'Connor and colleagues (Leifer et al., 2000).

    In the category of the role of IP management, Chapters 3, 4, and 6 are valuable must reads for anyone trying to open up innovation. The big idea in Chapter 3 is the emergence of secondary innovation markets and the specialization of innovation labor that are making access to external ideas and technologies even easier. It also includes an interesting historical perspective on the role of public policy in driving innovation (thank you, George Washington, for making patents possible). There are useful insights on where to scout for external innovation and how to know if you are in an industry where secondary innovation markets are forming.

    Chapter 4 focuses on IP management including, for example, the use of patent mapping as a way to support IP strategy formulation. Most useful was the notion of managing IP differently depending on the life-cycle stage of the technology. Chesbrough presents practical insight on how the management of IP changes from stage to stage. His conclusions are consistent with Moore (2005).

    Chapter 6 goes a step further by focusing on a new class of companies classified as innovation intermediaries. These companies help address the five challenges cited regarding accessing external information for innovation: (1) managing and protecting identity; (2) managing contamination risk; (3) identifying useful, nonobvious sources; (4) fostering a two-sided market; and (5) scaling efficiently with volume. Chesbrough provides a window into six such companies: InnoCentive, NineSigma, Big Idea Group, InnovationXchange, Shanghai Silicon IP Exchange, and Ocean Tomo. Each approaches the problem from a different perspective.

    In the area of open business models, Chapter 5 is the heart of the book, but readers should be sure to cover the other chapters to understand its implications fully. It begins with the definition of business model elements first offered in Open Innovation but includes more insight into what a business model does. The business model concept is pivotal for open innovation because it is the “framework to link ideas and technologies to useful economic outcomes” (p. 108). The valuable new addition brought by Open Business Models is the framework of six types of business models, each producing different levels of differentiation, each with a different kind of essential innovation process, and each with a different approach to IP management. I was confused by the way Type 1 and Type 2 were described as undifferentiated and differentiated. Was it the business model that was undifferentiated or the outcome it produced? Do all other business models besides Type 1 have to be differentiated or produce differentiated outcomes? I reconciled this by combining Types 1–3 and thinking about them as three different kinds of “closed” business models. That creates four categories: (1) closed; (2) externally aware; (3) externally integrated; and (4) externally adaptive. Beyond this relatively small point, I found the framework highly valuable. The implications are profound. To take advantage of open innovation you must open your business model. To open your business model, you must both fundamentally change the way you connect innovation to your business model and the way you manage IP. This chapter takes some time to internalize. Readers may find it helpful to focus on the end of each section where the author summarizes the differences in moving from type to type.

    Chapter 7 is about companies that have built business models around secondary IP markets—they create, own, market, and sell IP to other firms. I found the example of UTEK most compelling, a company that operates like a venture capital firm but instead of infusing small companies with capital infuses them with IP.

    Under the category of implementing open business models, the final chapter provides a bridge from concept to reality. Relative to Open Innovation, a book rich with detailed examples, Open Business Models is more theoretical—until it gets to this chapter. It profiles three different companies in terms of four areas of organizational change: (1) the initial catalyst for change; (2) early experiments or pilots; (3) recognizing new business models from these experiments; and (4) scaling up success. An IBM example was particularly valuable in terms of capitalizing externally on unused internal IP. A Procter & Gamble (P&G) example provided insight into the role of the CEO and the power of open innovation metrics and goals (in particular their 3/5 rule that called for patents to be made available to others within three years after a product was first shipped or five years after the patent was granted—whichever came earlier). An Air Products story is less of a “big bang” than the other two and should encourage those standing on the edge of open innovation waiting to dive in.

    This book should be required reading for all innovation executives in as much as it describes the very air that innovators will breath in the future. In fact, the argument it makes is so fundamental a change in thinking that I found it difficult to fully reconcile all the new concepts. My guess is that this thinking will continue to evolve from here, just as it did for the author from Open Innovation to Open Business Models. Do you need both books? If you had to pick only one, take this one. But there are some terribly good insights only covered in Open Innovationthat you probably shouldn't miss.

    Released: October 2, 2013, 2:27 pm
    Keywords: PDMA Blog


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