Thriving in the New Innovation Landscape

Open innovation advocate Henry Chesbrough tells how companies can successfully rethink their business models

by Reena Jana

Henry Chesbrough has long promoted the idea of "open innovation"—the practice of looking outside internal R&D labs for fresh ideas. In 2003, the executive director of the Center for Open Innovation at the Haas School of Business at the University of California, and an adjunct professor, published an article on the concept in MIT's Sloan Management Review, along with a book titled Open Innovation: The New Imperative for Creating and Profiting from Technology.

In December, Harvard Business School Press will publish Chesbrough's follow-up book, Open Business Models: How to Thrive in the New Innovation Landscape. The new book tackles the idea of radically making over traditional, closed business plans by implementing what may seem to be counterintuitive tactics.

Chesbrough's strategies often seem paradoxical, such as not taking legal action against owners of pirated copies of software in certain markets, mimicking the controversial actions of patent trolls, and licensing experimental technology or products deemed unviable within a company's own R&D unit.

Through compelling case studies from IBM (IBM) and Procter and Gamble (PG) he illustrates how major corporations—often at a point of crisis—successfully remade closed business models into more open ones that rely on outside networks and crowdsourcing.

Although Open Business Models is a follow-up to Open Innovation, it isn't necessary to have read the previous book. The new volume is written in a straightforward, accessible style—and even includes such helpful and unexpected sections as a concise history of patents in the U.S., for context. Businessweek.com's Reena Jana spoke with Chesbrough before the book hits the stands for a sneak peek into some of its key ideas. An excerpt of their conversation follows:

You suggest that companies license their unused technologies. Are there other ways to capitalize on R&D efforts that don't fit directly into a company's core business?

There are usually lots of products within most large companies that are stuck, bottled up, or on the shelf. Some of those ideas can become more viable if licensed or sold to an outside company. Another tactic for companies who want to try new, open business models is to create experimental or spin-off brands that, if they fail, won't damage the main brand.

For instance, Google (GOOG) has a separate Web page, mashedup.com, where it can try things out under another name and see how customers react, although Google also tries experimental things on its home page under the Google Labs section.

In the About section of mashedup.com, the site fesses up and says it's affiliated with Google.com. What they want is indicators of success in a lower-volume environment before going big and without doing any damage to the brand.

What type of business is best suited for "outside-in" partnerships, in which companies work with collaborators from other companies? Conversely, what type is more appropriate for "inside-out" collaboration, in which businesses license or sell their intellectual property to other companies?

If a company has a lot of internal R&D, I can guarantee they'll have unutilized tech. This type of business is a natural for an "inside-out" open business model. If a company has strong brands, strong distribution channels, and a strong relationship with customers, it is best suited for an "outside-in" open business model. Many companies actually have both.

Why is there often internal resistance to open business models, and how should managers combat such resistance?

There are genuinely rational reasons why managers would be resistant.