Innovation

Why Companies Should Have Open Business Models

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Because of two trends — rising R&D costs and decreased product revenues (due to shorter product life cycles) — companies are finding it increasingly difficult to justify investments in innovation. Business models that embrace open innovation address both issues. The development costs of innovation are reduced by the greater use of external technology in a firm’s own R&D process. This saves time, as well as money. And the firm no longer restricts itself to the markets it serves directly. Now it participates in other segments through licensing fees, joint ventures and spinoffs, among other means. These different streams of income create more overall revenue from the innovation.

To partake more fully in the benefits of open innovation, companies need to develop the ability to experiment with their business models, finding ways to open them up. Building that capability requires the creation of processes for conducting experiments and for assessing their results. Although that might seem obvious, many companies simply do not have such processes in place. In most organizations, no single person short of the CEO bears responsibility for the business model. Instead, business unit managers (who are usually posted to their jobs for just two to three years) tend to take the business model for granted.

To understand how an organization can open its business model, the author provides case examples of IBM, P&G and Air Products, three companies that operate in different industries with vastly different technologies and products. Each used to function with a very internally focused, closed business model. And each has since migrated to a business model that is substantially more open.

Henry W. Chesbrough is the executive director of the Center for Open Innovation at the Haas School of Business, University of California, Berkeley. He is the author of the recently published Open Business Models: How to Thrive in the New Innovation Landscape (Harvard Business School Press, 2006) and the earlier Open Innovation: The New Imperative for Creating and Profiting from Technology (Harvard Business School Press, 2003).

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