Business Model Generation

Def_Pattern No. 5

OPEN BUSINESS MODELS can be used by companies to create and capture value by systematically collaborating with outside partners. • This may happen from the “outside-in” by exploiting external ideas within the firm, or from the “inside-out” by providing external parties with ideas or assets lying idle within the firm.

1 • Open Business Models: How to Thrive in the New Innovation Landscape. Chesbrough, Henry. 2006.

2 • “The Era of Open Innovation.” MIT Sloan Management Review. Chesbrough, Henry. Nº 3, 2003.

Open innovation and open business models are two terms coined by Henry Chesbrough. They refer to opening up a company’s research process to outside parties. Chesbrough argues that in a world characterized by distributed knowledge, organizations can create more value and better exploit their own research by integrating outside knowledge, intellectual property, and products into their innovation processes. In addition, Chesbrough shows that products, technologies, knowledge, and intellectual property lying idle inside a company can be monetized by making them available to outside parties through licensing, joint ventures, or spin-offs. Chesbrough distinguishes between “outside-in“ innovation and “inside-out” innovation. “Outside-in” innovation occurs when an organization brings external ideas, technology, or intellectual property into its development and commercialization processes. The table opposite illustrates how companies increasingly rely on outside sources of technology to strengthen their business models. “Inside-out” innovation occurs when organizations license or sell their intellectual property or technologies, particularly unused assets. In this section we describe the business model patterns of firms that practice open innovation.

In June of 2000, amid a continuing slide in Procter & Gamble’s share price, longtime P&G executive A.G. Lafley got the call to become the consumer product giant’s new CEO. To rejuvenate P&G, Lafley resolved to put innovation back at the company’s core. But instead of boosting R&D spending, he focused on structuring a new innovation culture: one that moved from an internally focused R&D approach to an open R&D process. A key element was a “Connect & Develop” strategy aimed at exploiting internal research through outside partnerships. Lafley set an ambitious goal: create 50 percent of P&G’s innovations with outside partners at a time when that figure was closer to 15 percent. The company surpassed that goal in 2007. Meanwhile, R&D productivity had soared 85 percent, even though R&D spending was only modestly higher compared to when Lafley took over as CEO.

In order to link its internal resources and R&D activities with the outside world, Procter & Gamble built three “bridges” into its business model: technology entrepreneurs, Internet platforms, and retirees.

The inside-out approach to open innovation ordinarily focuses on monetizing unused internal assets, primarily patents and technology. In the case of GlaxoSmithKline’s “patent pool” research strategy, though, the motivation was slightly different. The company’s goal was to make drugs more accessible in the world’s poorest countries and to facilitate research into understudied diseases. One way to achieve this was to place intellectual property rights relevant to developing drugs for such diseases into a patent pool open to exploration by other researchers. Since pharmaceutical companies focus mainly on developing blockbuster drugs, intellectual property related to less-studied diseases often lies idle. Patent pools aggregate intellectual property from different rights-holders and makes it more accessible. This helps prevent R&D advances from being blocked by a single rights-holder.

Unused internal ideas, R&D, and intellectual property related to diseases in poor nations have substantial value when “pooled”

Companies seeking insights from external researchers incur substantial costs when trying to attract people or organizations with knowledge that could solve their problems. On the other hand, researchers who want to apply their knowledge outside their own organizations also incur search costs when seeking attractive opportunities. That is where a company called InnoCentive saw opportunity.

InnoCentive provides connections between organizations with research problems to solve and researchers from around the world who are eager to solve challenging problems. Originally part of drug maker Eli Lilly, InnoCentive now functions as an independent intermediary listing non-profits, government agencies, and commercial organizations such as Procter & Gamble, Solvay, and the Rockefeller Foundation. Companies who post their innovation challenges on InnoCentive’s Web site are called “seekers.” They reward successful problem-solvers with cash prizes that can range from $5,000 to $1,000,000. Scientists who attempt to find solutions to listed problems are called “solvers.” InnoCentive’s Value Proposition lies in aggregating and connecting “seekers” and “solvers.” You may recognize these qualities as characteristic of the multi-sided platform business model pattern (see Multi-Sided Platforms). Companies with open business model patterns often build on such platforms to reduce search costs.

“Open Innovation is fundamentally about operating in a world of abundant knowledge, where not all the smart people work for you, so you better go find them, connect to them, and build upon what they can do.”

—— Henry Chesbrough
Executive Director, Center for Open Innovation
Haas School of Business, UC Berkeley

“Long known for a preference to do everything in-house, we began to seek out innovation from any and all sources, inside, outside the company.”

“Nestlé clearly recognizes that to achieve its growth objective it must extend its internal capabilities to establish a large number of strategic partnering relationships. It has embraced open innovation and works aggressively with strategic partners to co-create significant new market and product opportunities.”