Open Innovation: The New Imperative for Creating and Profiting from Technology
Henry Chesbrough
Harvard Business Press (2003)

A “new vision” of the innovation process

In preparation for my second interview of Henry Chesbrough, I recently re-read his Open Business Models (2006) and then this book, first published in 2003, as well as his latest book, Open Services Innovation: Rethinking Your Business to Grow and Compete in a New Era (2011).

In this volume, Chesbrough explains that a business model “performs two important functions: it creates value and it captures a portion of that value. It creates value by defining a series of activities from raw materials through to the final consumer that will yield a new product or service with value being added throughout the various activities. The business model captures value by establishing a unique resource, asset, or position within that series of activities, where the firm enjoys a competitive advantage.”

Having thus established a frame-of-reference, Chesbrough continues: “An open business model uses this new division of innovation labor – both in the creation of value and in the capture of a portion of that value. Open models create value by leveraging many more ideas, due to their inclusion of a variety of external concepts. Open models can also enable greater value capture, by using a key asset, resource, or position not only in the company’s own business model but also in other companies businesses.”

As Chesbrough explains, what he characterizes as “Closed Innovation” has a number of implicit rules such as “The company that gets an innovation to market first will usually win” and “We should control our intellectual property, so that our competitors don’t profit from our ideas.” As a result of several “erosion factors” that have undermined its logic, Chesbrough asserts, the Closed Innovation paradigm is rapidly becoming obsolete. (Please see Table 1-4, “Contrasting Principles of Closed and Open Innovation,” on Page xxvi in the Introduction.) “When the innovation context shifts from Closed to Open, the process of innovation must change as well.”

Chesbrough carefully organizes his material within nine chapters. In the first, he examines one of the most familiar examples of a company (Xerox Corporation) that selected technologies from its research laboratory (Palo Alto Research Center) that fit its business model, and rejected others. Apple was among the major beneficiaries of that process. “Xerox’s management of its PARC technologies illustrates in a nutshell the transition from Closed Innovation to Open Innovation. Chesbrough examines the Closed Innovation Paradigm is analyzed in Chapter 2 and the Open Innovation Paradigm in Chapter 3, then offers a business model in Chapter 5 that illustrates how to connect internal and external innovation. For me, some of the most valuable material in the book is provided in this chapter. Then in the next three chapters, Chesbrough focuses on three major corporations: IBM and its transformation from Closed to Open Innovation (Chapter 5), Open Innovation at Intel, (Chapter 6), and the New Ventures Group within Lucent Technologies organization (Chapter 7).

In the last two chapters, Chesbrough first shifts his attention to a critically important subject, the management of intellectual property (IP) in the innovation process. “In a world of abundant knowledge, companies should be active buyers – and active sellers of IP.” Earlier in his book, Chesbrough had explained why ideas that are not readily used could be lost. They and the people who create them “no longer can be warehoused until the companies’ own businesses are ready to make use of them. Companies that do not use their ideas with alacrity risk losing them – and the people who thought of them – to outside organizations.” Of course, as Chesbrough explains in Chapter 4, the value of an idea is determined by the given business model. “There is no inherent value in a technology per se. The value is determined instead by the business model used to bring it to market.” Apple gratefully embraced technologies that Xerox had rejected.

How to complete the transition to a more Open Innovation system? Chesbrough responds to that question in the last chapter, providing a number of strategies and tactics. He recommends devising a strategic map that identifies the given organization’s recent innovative ideas as well as those within its industry. On Page 178, he provides a list of questions to ask while completing the map, a document best viewed as “a work in progress.” He then offers rock-solid advice on how to proceed with the “roadmap.” As I absorbed and digested Chesbrough’s brilliant insights on these and other key business issues prompted me to recall my own involvement with a number of organizations that struggled – with mixed success – to complete that process. I now presume to share some of the most important lessons I learned:

1. When designing and implementing an “open” business model, the first requirement is that everyone involved has both an “open” mindset (i.e. receptive to new ideas, whatever their source may be) and is not only willing but also eager to collaborate with others within and beyond her or his own organization. So-called “conventional wisdom” is often a justification for defending the status quo.

2. When setting objectives, focus on the most serious problems to solve and on the most important questions to answer.

3. With regard tracking progress, measure only what really matters…and do so with accuracy and consistency. Meeting deadlines, for example, as well as first-pass yield and cycle time. Be especially alert for variances.

4. Have “open” communication, cooperation, and collaboration at all levels and in all areas throughout what should be viewed as an extended enterprise. There is so much of value to be learned from associates, of course, (especially in other departments), but also from customers, vendors, strategic allies, and other stakeholders within the given value chain. Moreover, Chesbrough cites examples of situations in which valuable information was obtained (legally) from competitors.

5. Open Innovation is a journey of discovery. Therefore, view all problems as learning opportunities. Focus on determining their root causes rather than merely responding to their symptoms.
By opening itself up to the world of knowledge that surrounds it, the twenty-first-century corporation can avoid the innovation paradox that plagues so many firms’ R&D activities today. In so doing, the company can renew its current business and generate new business. For the innovative company in a world of abundant knowledge, today can be the best of times.”

By opening itself up to the world of knowledge that surrounds it, the twenty-first-century corporation can avoid the innovation paradox that plagues so many firms’ R&D activities today. In so doing, the company can renew its current business and generate new business. For the innovative company in a world of abundant knowledge, today can be “the best of times.”