Innovation is becoming an increasingly open process thanks to a growing division of labor. One company develops a novel idea but does not bring it to market. Instead, the company decides to partner with or sell the idea to another party, which then commercializes it. To get the most out of this new system of innovation, companies must open their business models by actively searching for and exploiting outside ideas and by allowing unused internal technologies to flow to the outside, where other firms can unlock their latent economic potential.
Let’s be clear about what is meant by the term business model. In essence, a business model performs two important functions: It creates value, and it captures a portion of that value. The first function requires the defining of a series of activities (from raw materials through to the final customer) that will yield a new product or service, with value being added throughout the various activities. The second function requires the establishing of a unique resource, asset or position within that series of activities in which the firm enjoys a competitive advantage.
Open business models enable an organization to be more effective in creating as well as capturing value. They help create value by leveraging many more ideas because of their inclusion of a variety of external concepts. They also allow greater value capture by utilizing a firm’s key asset, resource or position not only in that organization’s own operations but also in other companies’ businesses.
To appreciate the potential of this new approach, consider the following names: Qualcomm Inc., the maker of cellular phone technology; Genzyme Corp., a biotechnology company; The Procter & Gamble Co., a consumer products corporation; and Chicago, the musical stage show and movie. This assortment might appear to be random, but they all have something in common: Each required an open business model in which an idea traveled from invention to commercialization through at least two different companies, with the different parties involved dividing the work of innovation. Through the process, ideas and technologies were bought, sold, licensed or otherwise transferred, changing hands at least once in their journey to market.
Qualcomm used to make its own cell phones and base stations but ceased doing so years ago.1 Now others manufacture those products, and Qualcomm just makes chips and sells licenses to its technologies, period.
1. See D. Mock, “The Qualcomm Equation: How a Fledgling Telecom Company Forged a New Path to Big Profits and Market Dominance” (New York: Amacom, 2005) for a very helpful, in-depth study of the company. Mock had access to key leaders in the company, including those who were there at the beginning and have since retired.
2. A very recent book — G.P. Pisano, “Science Business: The Promise, the Reality, and the Future of Biotech” (Boston: Harvard Business School Press, 2006) — shows that the biotechnology industry in which Genzyme participates has had very few companies that could make a profit. Genzyme is one of only three companies (the others being Amgen Inc. of Thousand Oaks, California, and Genentech Inc. of San Francisco) out of more than 100 biotech firms that have demonstrated the ability to sustain profits in this treacherously difficult industry.
3. The story behindChicago originated with Maurine Dallas Watkins, a Chicago-based journalist who covered the crime beat in that city when the murder of Walter Law occurred. Watkins reported the subsequent trial and afterwards she wrote a play,Chicago, about those events. The play was performed on Broadway in 1926 and made into a silent movie in 1927. It was revived by Bob Fosse in 1975 and revived again by Harvey Weinstein in 1997. The 2002 movie version ofChicago won six Academy Awards. Sources: Wikipedia, http://en.wikipedia.org/wiki/Maurine_Dallas_Watkins (last accessed April 26, 2006) and interview with Richard Kromka, Silicon Ventures investor event, Santa Clara, California, March 16, 2004.
4. The ideas in this paragraph are inspired by D. Teece, G. Pisano and A. Shuen, “Dynamic Capabilities and Strategic Management,” Strategic Management Journal 18, no. 7 (1997): 509–533. This article is both a critique of academic scholarship into business strategy and a presentation of a concept calleddynamic capabilities that describes how firms adapt their strategies to changing markets and technologies.
5. A. Arora, A. Fosfuri and A. Gambardella, “Markets for Technology: The Economics of Innovation and Corporate Strategy” (Cambridge, Massachusetts: MIT Press, 2001).
6. L. Huston and N. Sakkab, “Connect and Develop: Inside Procter & Gamble’s New Model for Innovation,” Harvard Business Review 84, no. 3 (March 2006): 58–66. This article provides an in-depth look at P&G’s innovation process, with some tantalizing anecdotal evidence of business results.
7. Gerstner’s own account of his years at IBM can be found in L.V. Gerstner, Jr., “Who Says Elephants Can’t Dance?: Inside IBM’s Historic Turnaround” (New York: HarperCollins, 2002).
8. Interview with Joel Cawley, IBM vice president of corporate strategy, at his office in Armonk, New York, on October 7, 2005.
10. Larry Huston’s remarks were made in a talk he delivered at the Mack Technology Center at The Wharton School, the University of Pennsylvania, on May 14, 2004.
11. Collins’ quote and the information on nanotechnology at Air Products are taken from J. Teresko, “From Confusion to Action,” Industry Week (Sept. 1, 2005) available at www.industryweek.com/ArticleID=10650.
12. Other people at Procter & Gamble who deserve credit for this insight include Nabil Sakkab, who preceded Gil Cloyd as P&G’s CTO, and Durk Jager, who preceded A.G. Lafley as CEO.
13. It is ironic but true that companies blessed with significant internal R&D capabilities that routinely conduct tremendously complex experiments running into many millions of dollars have little or no capability of conducting even simple experiments on the business model that supports that internal R&D. A great introduction to these issues is contained in S.H. Thomke, “Experimentation Matters: Unlocking the Potential of New Technologies for Innovation” (Boston: Harvard Business School Press, 2003). If companies became more capable of experimentation with their business models on a routine basis, there would be less need for a crisis to trigger the experiments that companies like IBM or P&G made.
14. Although both Ford and General Motors have been creative in developing sales incentives (such as employee pricing, zero-percent financing, Keep America Rolling and so on) or long-term research projects (including hydrogen vehicles), neither company seems to be any stronger relative to its competitors, even after many years of cost-cutting. The companies’ market shares have declined dramatically, and Toyota is poised to become the largest automotive company in the world in 2008. There was a reprieve during the 1990s, thanks to the innovations of the sport utility vehicle and the minivan, which temporarily boosted United States manufacturers’ margins and sales. But these innovations were soon copied, and the underlying weaknesses of the United States auto industry were again exposed. As of this writing, it is likely that the financial condition of these mainstays of United States industrial strength will weaken much further before any lasting improvement is made.