Innovation & Design

Thriving in the New Innovation Landscape


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

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. If all goes well, the person who suggests a more open model will get some credit, but the danger is that he or she will then be asked to do more with less internal resources next time around.

One way to combat resistance is to offer incentives to researchers who could help the company by tapping into a network outside the company rather than concentrating solely on internal R&D. Now, most companies only reward research staff for internally developed projects. When R&D staffers get a patent, most companies will give those researchers some money and a plaque.

But what about offering rewards for the researcher who brings in tech from outside, especially if such a move solves a business problem? This might prompt researchers to help widen the pool of outside collaborators or introduce the company to new, efficient tech.

You warn about the dangers of being "too open." Do nondisclosure agreements or no-compete clauses offer enough protection against the poaching of ideas?

Even if both sides sign a legal document, it's not enough. Larger companies can maneuver around them. They can learn about your business and then create a similar but different enough technology that competes with you. For a small company, it's important to be careful, don't say too much too soon.

It's important, too, to have an alternative big-name potential collaborator for leverage when considering partnering with a larger company. Ideally, the alternative partner would be a competitor of the first. Finally, it's essential to really understand the business model of the potential partner. If it's aligned with yours, go for it.

One company I mention in my book, GO, wanted to collaborate with Microsoft (MSFT), but failed to realize Microsoft's business model would force Redmond to eventually compete with GO. It's a big mistake to think some piece of paper will save you, or that the larger company will buy you. These are high-risk approaches.

In some cases, your support of "open business models" goes so far as to include pirating. How can that be good for a company?

Microsoft should allow the practice as part of its battle to make Windows the dominant operating system in China, where software pirating is rampant. See, if they saw pirating as part of their battle against Linux, they'd understand that every pirated copy of Windows is another copy of Linux not being sold. If they truly cut off pirated copies in China, where Windows can cost up to a month's wages for most workers, they'd lose market share.


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