In his 2003 book "Open Innovation: The New Imperative for Creating and Profiting from Technology," Henry Chesbrough showed companies learning how to look outside themselves for innovation and explained why they needed to do so. Today the open-innovation imperative is a little less new, a lot more widely felt, and not a whole lot easier to act upon. But take heart: Chesbrough, a professor at the UC Haas School of Business, has a new book in which he tackles the all-important question of how to construct or modify a business model to make it suitable for the current climate. The book is "Open Business Models: How to Thrive in the New Innovation Landscape," and it's due out next month.
So, what does an open business model look like? What are companies such as Dell (which you may already consider deeply engaged with suppliers and customers) and Apple (which you may not) doing that you should know about? At the heart of the book is Chesbrough's taxonomy of six business models that exhibit varying degrees of openness, ranging from what he calls undifferentiated to highly adaptive. In the excerpt that follows, Chesbrough, describes the three most advanced, starting with Type 4, "Externally Aware".
4 The Type 4 business model is externally aware, and selectively incorporates external innovation inputs into the business. Such external innovation reduces the cost of serving the business, reduces the time it takes to get new offerings to market, and shares the risks of new products and processes with external parties.
In addition to the planning and organizational commitments of Type 3, innovation is now driving the company to look outside for ideas and inputs to the innovation process. This more external perspective manifests itself in manifold ways. One is that internal road maps are now shared with suppliers and customers on a frequent basis. This enables the firm to make much more systematic use of innovative ideas from suppliers and from customers. It also allows suppliers and customers to plan their own activities in concert with the innovative activities of the firm. Another role that emerges is an active technical advisory board, populated by technical and industry experts. This TAB provides a forum for external input to come into the firm, well beyond the inputs available from suppliers and customers. Universities, for example, are now contacted and cultivated for possible new ideas. Often, formal projects and ongoing linkages are forged out of TAB connections.
The perspective of the Type 4 company toward innovation begins to shift from a product/process/technology focus towards a business focus.
5 The Type 5 company integrates its innovation process with its business model.
Type 5 companies now take the time to understand the supply chain all the way back to the basic raw materials, as they look for major technical shifts or cost reduction opportunities. Type 5 companies also invest substantial resources to study "the customer's customer" to learn the deeper unmet needs and opportunities in the market. Distribution channels are in play as well. While current channels are leveraged as much as is practicable, alternative distribution arrangements are actively considered. Some experimentation is conducted on alternative distribution channels, and indeed, upon alternative configurations of the business model.
The Type 5 business model uses its understanding of customers and suppliers to identify discrepancies and disconnections between the customer's or supplier's business model and company's own business model, both in the current business and in new business areas. These issues are proactively identified, and actions are taken to address the situation, so that the company maintains alignment of its business model with that of its customers and key suppliers.
Innovation is becoming embedded inside the corporate DNA in companies operating with a Type 5 business model. Staff members from every functional area feel that they are able to contribute to the future of the company. In Type 5, the company has become an effective integrator of both internal R&D and external R&D. The business model consciously considers how to create systems and architectures that make the best out of both, and begins to conceive of itself as a platform for innovative activities.
IP management now takes on a more strategic character as well. Patent mapping now identifies revenue generation opportunities, as well as risk reduction opportunities. External technologies are now actively sought in the secondary market for strengthening the internal IP portfolio. External licensing is set up as a profit center, with quarterly and annual targets for revenue, and budgets allocated to support licensing as a business. In short, the firm begins to manage IP as a financial asset, seeking how best to optimize its value on both the sell side (with its own underutilized technologies) and the buy side (searching for external technologies). The firm has begun to track these secondary markets, with an internal team and external intermediaries both contributing to its efforts.
Organizationally, innovation is viewed in a Type 5 company as a business function, led by a senior manager. Engineering, marketing, and finance collaborate in developing and managing business model through cross functional innovation teams.
6 The Type 6 company's business model is able to change, and is changed by, the market. The Type 6 business model is an even more open and adaptive model than types 4 or 5. One important attribute of a company with a Type 6 business model is its ability to innovate its own business model. This requires a commitment to experimentation with one or more business model variants, and a willingness to invest some amount of funds and management attention to explore alternative ways to profit from innovation. This experimentation can take a number of different forms. Some companies utilize corporate venture capital as a means to explore alternative business models in small startup companies. Some utilize spinoffs and joint ventures as means to commercialize technologies outside of their own current business model. (Later success with a spinoff or joint venture, in turn, might help the company shift its own business model in that direction). Some have created internal incubators to cultivate promising ideas that are not yet ready for high volume commercialization.
Experimentation with the business model also extends to customers and suppliers. In Type 6, key suppliers and customers become business partners, entering into relationships in which both technical and business risk are shared. The business models of suppliers are now integrated into the planning processes of the company. The company in turn has integrated its business model into the business model of its key customers. This allows the company to create its business model as a platform to lead its industry, including suppliers and customers. And this platform effectively organizes and coordinates the work of many others in the service of the business model.
Dell is a good example of both the supplier and customer dimensions of this Type 6 partnership with suppliers and customers. With regard to its management of suppliers, Dell segments its suppliers, just as it segments its customers. Its relationship with Intel, for example, goes far beyond that of a traditional supplier or vendor. Dell works closely with Intel on future technology planning. It acts as an early test bed for new Intel chips, and often is the first company to develop a new motherboard for the next generation chip. It shares all of its field failure data with Intel. And, until May 2006, Dell purchased its chips exclusively from Intel, rather than buying chips from Intel's rival, AMD.
Dell also works closely with its enterprise customers, which it segments (and treats quite differently) from its consumer customers. Dell maintains a database of all Dell products sold at each enterprise. The customer can specify a three- year or four-year rotation period for receiving new Dell computer products, and Dell effectively administers the company's rotation policy on behalf of the customer. It will even create and install a customized software configuration for that customer, so that each employee at each company location receives a new PC or notebook every three or four years, loaded with the exact software specified by the customer. This saves IT costs for Dell's customers, and creates strong incentives for ongoing relationships with Dell, which in turn generates more data for Dell on all of the users at each enterprise customer.
One important device that enables this integration of business models throughout a value chain is the ability of the company to establish its technologies as the basis for a platform of innovation for that value chain.
In this way, the company can attract other companies into its business by sharing the tools, standards, IP, and other know-how that are needed for these supporting players to successfully implement the platform. This platform not only coordinates internal R&D with external R&D toward desired business objectives; it also shapes the future direction of that coordination. It further extends coordination beyond the value chain to the surrounding value network or ecosystem in which the investments of third parties add additional value to the platform itself.
This has been the happy achievement for Apple's iPod. The success of the iPod and Apple's business model for the iPod now elicit new types of accessories, and a variety of enhancements that collectively amount to significant industry investment in the iPod platform. Still others are exploring ways to utilize the iPod for recording and displaying medical information, financial information, and other real time information. The presence of this wealth of additional complementary items greatly boosts the value of the iPod. Yet Apple does not pay anything to induce these investments. Others are investing money that will help Apple make more money. Talk about a great business model!
As the iPod moves from its growth phase to the mature phase of the TLC, however, Apple's business model will likely have to change as well. To harness the iPod platform for a variety of new market segments, Apple will have to open up more of the iPod architecture to allies and partners in order to exploit these opportunities. Apple has begun to do this already with cell phones and its iPod technology, and will have to partner more extensively for medical markets, financial information uses, and so on. Apple will also need to inject new external technology into the iPod architecture to stay ahead of improving MP3 and other rival media playback technologies.
External licensing in Type 6 companies has become part of the organizational DNA within the overall innovation model. The NIH (Not Invented Here) syndrome is no longer an issue, and external technology is put on an equal footing with internal technology. Similarly, it is quite natural for companies to actively outlicense underutilized internal technologies as well. IP is no longer merely a financial asset. It is now managed as a strategic asset, enabling the firm to enter or exit markets, foster spinoffs or spin-ins, build ecosystems within markets, and make money. The central IP management organization now exists as a center of excellence to support the business units in their management of IP. The firm engages with the secondary market for IP on a sustained basis, and enjoys superior knowledge about what the going rate is for a variety of technologies which it might choose to buy or to sell. It also enjoys a preferred relationship with IP intermediaries and market makers, enabling it to be presented with opportunities well ahead of most other firms. - Henry Chesbrough
Excerpted with permission from Harvard Business School Press. "Open Business Models: How to Thrive in the New Innovation Landscape" by Henry Chesbrough. ©2006 Harvard Business School Press. All rights reserved.
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