Chesbrough is Adjunct Professor, Haas School of Business at the University of California, Berkeley, and Executive Director of its Center for Open Innovation. His landmark book Open Innovation: The New Imperative for Creating and Profiting from Technology (2003) articulated a new paradigm for industrial research and development. His most recent book Open Business Models: How to Thrive in the New Innovation Landscape (2006) carries the open approach a step further, arguing that business models themselves need to become more open. Innovating business models requires open technology strategies, but also new approaches to managing intellectual property as well.
Note: I conducted this review in 2008, Chesbrough has since published Open Services Innovation: Rethinking Your Business to Grown and Compete in a New Era (2011).
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Morris: For those who have not as yet read any of your articles or books, please provide a brief explanation of what the “open business model” is and why you consider it preferable to more traditional (“closed”) models.
Chesbrough: Open Innovation is based on the fundamental idea that useful knowledge is now widespread. No one company has a monopoly on great ideas, and every company, no matter how effective internally, needs to engage deeply and extensively with external knowledge networks and communities. A company that practices open innovation will utilize external ideas and technologies as a common practice in their own business and will allow unused internal ideas and technologies to go to the outside for others to use in their respective businesses.
The reason that this is preferable to the more traditional, closed model is that this open approach corresponds much more closely to the state of knowledge in most industries today. Traditional approaches require too much money, too much time, and carry too much risk for the innovating firm. Open approaches can perform better on all three dimensions.
Morris: Here’s a related question. What are “outside-in” and “in-side out” ideas? Also, why are both types needed?
Chesbrough: “Outside-in ideas” refers to bringing in external ideas into one’s own innovation process. A chemicals company might partner with a university professor to conduct some research on a new kind of material (say, from nanotechnology). If the research goes well, the company might choose to license it from the professor’s university, hire the professor as a consultant, transfer the technology inside, and begin to incorporate that material with other technologies inside the company.
“Inside-out ideas” refers to the alternative case where a company has developed an idea or technology that it isn’t using internally, and lets it go to the outside, through licensing, or a spin-off company, or a joint research project or collaboration.
Morris: What are some of the most common misconceptions about what innovation is…and isn’t? For example, many executives think of innovation wholly in terms of high technology.
Chesbrough: Innovation is not simply about invention, though they are often used as synonyms in casual conversation. Innovation requires taking something through to the market, and solving a customer’s problem with it. In my latest book, Open Business Models, I argue that business models themselves are ripe for innovation, though there are many barriers to doing that.
Morris: Jim Collins has suggested how a good company can become a great company. How can a company “open up” its business model? More specifically, by what process can that be achieved?
Chesbrough: Yes, this what I was just talking about. Business models perform two crucial business tasks: they create value in a value chain, and they capture a piece of that value for the innovating firm. Opening up the business model can actually increase the ability to do both tasks better. More open value creation leverages the generative power of people and communities all over the world. And more open value capture can stimulate novel ways to profit from this generative force, whether it be through standards, intellectual commons areas, or stimulating greater competition and innovation in ways that effectively lower your own costs.
The process of innovating business models, though, is more problematic. In my observations and discussions with companies, I find most lack any effective process for experimenting with their business models. The business manager or general manager is typically on a 2-3year rotation, which is not enough time to run the tests, gather the results, understand their meaning, launch some initiatives, see which ones work, and scale up the most promising. And many others must be involved, so functional leaders like the VP of Engineering or R&D or Marketing lacks the charter to drive the development of a new business model.
Morris: For various reasons, most change initiatives fail or at least fall far short of initial expectations. What are the most common barriers these initiatives encounter? How can they most effectively be overcome?
Chesbrough: I devoted an entire chapter to this question in Open Business Models. One common barrier is the “Not Invented Here” syndrome. Companies develop an allergic reaction to anything that didn’t originate inside their own four walls. A corollary barrier is the “Not Sold Here” syndrome, where a business unit wields an effective veto over any external use of a technology, even if the unit itself is not using it.
The root cause underlying both syndromes is that of a monopoly or monopsony. R&D units don’t want any competition (hence NIH) and neither do the business units (NSH). Practicing open innovation involved creating a certain amount of healthy competition between internal and external sources and uses.
Morris: Define an “innovation intermediary” and explain its importance to an open innovation approach?
Chesbrough: Innovation intermediaries act as “go-betweens”, situating themselves between companies who are looking for new ideas on the one hand, and others who have ideas looking for solutions on the other. They provide a useful way for companies to experiment with open innovation, before committing significant internal resources and staffing to the effort. Examples of these intermediaries include InnoCentive, NineSigma, Yet2.com, YourEncore.com, and fellowforce.com.
Morris: In Open Business Models, you suggest that the “journey” to establishing such a model can be examined in four distinct phases: (1) a shock to the system; (2) searching and experimenting to find new revenue sources; (3) identifying successful business models; and (4) scaling up and adjusting the model. What is innovation’s role throughout this four-stage process?
Chesbrough: These phases are really about organizational change, and open innovation is just the proximate trigger for the organization to have to go through the pain and the cost of doing things differently. The point is that many organizations hear about open innovation and talk about employing it. Some even start experimenting with it. But those that have really benefited from it went through a far more searing experience that caused them to change many processes and in some cases people, before they harvested the full benefits of the concept. Put differently, a company must make a number of changes to its innovation process to really see the results from adopting open innovation.
Morris: In the Introduction to Open Innovation, you suggest that the open innovation perspective “suggests some very different principles for research and innovation.” Please elaborate on that point.
Chesbrough: Let me compare and contrast three. First, in the traditional approach, the reliance is on deep vertical integration and internal R&D networks for innovative success. In the open innovation approach, there is much greater reliance on connection, collaboration, and partnerships for innovative success. Second, in the closed model, the working assumption was that the best people in the field work for you. And you worked hard to recruit and retain those people. In the open innovation context, not all the smart people work for you. You still need smart people, but part of their job now is to identify, connect, and leverage the knowledge of the many more smart people outside your organization. A third contrast is in the management of intellectual property (IP). That used to be something done for purely defensive reasons to preserve the freedom to invent and operate. Now IP becomes a critical enabler to access external ideas, and/or to profit from letting your ideas go out to others.
Morris: In Open Innovation, you devote an entire chapter to each of two companies, IBM and Intel. However different their approaches may be, what do they share in common in terms of how they have pursued “innovation opportunities in an environment of abundant knowledge”?
Chesbrough: Both companies devote substantial resources to internal R&D. So open innovation is NOT about “outsourcing R&D” and getting rid of everyone inside. Both Intel and IBM, for example, extend and leverage their internal R&D with extensive investments and relationships with universities, startups, other companies, and research consortia.
Morris: Given your response to the previous question, what are the most important lessons that other companies can learn from IBM and Intel?
Chesbrough: One subtle yet powerful lesson is that, in a world of widely diffuse useful knowledge, much of the real value can be gained not from developing yet another piece of knowledge, but rather from creating systems and architectures that combine these disparate pieces of knowledge together in useful ways that solve real problems. This “systems integration” or systems architecture capability is of particular value in an open innovation environment.
Morris: With all due respect to what you characterize as “the value of a multiplicity of business models for innovation,” how can a company select components from several and then successfully integrate them within a cohesive business model of its own?
Chesbrough: My point is that it is likely to be the case that the current business model, if it is successful, developed over many years. At this point, it may have taken on a life of its own, and become rather inert. In that case, it is only a matter of time before the business model drifts out of alignment with the needs of customers and the capabilities available in that environment.
By looking more broadly at business models in a variety of industries, one can conceptualize a broader set of alternative business models one might explore in order to manage or even avoid the risk of business model obsolescence.
Morris: One final question. As you look ahead to the next 3-5 years, to what extent do you expect any major revisions of the “open business model” and why, in your opinion, will such changes be necessary?
Chesbrough: There will never be such a thing as “the last word on innovation,” precisely because innovation is about change at its root. So I expect that at least some companies will embark upon new business model experiments that will be astonishing and exciting to those of us writing today. And I expect that many of these experiments will not be in the high tech domain, but in consumer packaged goods, or services, or other areas that we often neglect in our thinking about cutting-edge innovation. I also think we’ll become much more aware of business models in other countries, models that work well there that may not even be tried in the US. Or, to turn it around, US companies will have to innovate their business models substantially in order to succeed in penetrating the new growth opportunities of countries like Brazil, China, India, and Russia.