Introducing Open Innovation
I have been commenting on ‘openness’ according to Google, in an earlier post. Since then I am struggling with the many ways the term ‘open’ is used in relation to e-business. This has been a reason to pick up the book ‘Open Business Models’ by Henry Chesbrough. In contrast with what you might think, open business models are not business models that are revealed to the world at large. Rather, the term relates to an earlier Chesbrough book: ‘Open Innovation’. The core idea behind open innovation is that companies can seek out external ideas to help their innovation processes and to allow their own (left over) innovations to be sold to other companies. In the book ‘Open Business Models’, Chesbrough explores the possibility for companies to incorporate open innovation structurally in their business processes. He does so with a compelling mix of theoretical arguments and case studies. For my struggles in making sense of the developments in internet technology and business, the book turned out to be helpful and, additionally, it gave me a couple of valuable lessons about business strategy. This is the first of a couple of posts about the book. In this post I will explain the incentive for open innovation and the difficulties associated with it, in later post I will deal with the business solutions Chesbrough offers and the application of his thinking to internet technology.
In order to understand Chesbrough’s argument for open innovation you need to make a distinction between three core concepts: intellectual property (IP), technology and business models. Let me explain the differences with an example. Say you are a bakery owner and you manage to improve the recipe of a really famous local meatloaf specialty. Maybe you made a vegetarian version, containing nuts rather than meat. Let’s call the delicious piece of bread nutsloaf. In that case you have done an innovation and you are owner of the idea (recipe) of this innovation: the intellectual property (IP).The material manifestation of the idea: the tangible (edible) nutsloaf is the technology. Your business model specifies how you make money from nutsloaf: probably by selling it to your costumers. So why not start selling nutsloaf right away, and get rich? Well, there may be at least two bottlenecks.
First, a fellow bakery owner, who gave you the original meatloaf recipe that you improved upon, may complain. While you are the owner of the IP of putting nuts rather than meat in the meatloaf, you still use much of the old recipe and this is copyright infringement. Improving his recipe is probably not covered by the agreement you have with the fellow baker. In Chesbrough’s terms you would say that there is a conflict between IP and technology. A second problem can be that your costumers may not want to eat nutsloaf at all. You may be serving a traditionalist consumer base. Your costumers want the original thing, not a vegetarian rip-off. The trendy coffee corner, ACoupleOfBlocksAway may be able to sell it, but you will only scare away your costumers. In that case there is a conflict between your business model: selling traditional products to traditionalist consumers and the technology (new and improved meatloaf).
Innovative companies face these problems all the time: they invent technologies that embed an IP infringement and they invent technologies that they cannot sell within their business models.The proposed solution is to cooperate with others to make sure that you can earn a buck from ideas that you cannot practice yourself. But that is not trivial. First, since you do not manage to sell nuts-bread to your consumers, it takes quite a thinking leap to imagine ACoupleOfBlocksAway can. Well maybe that is doable, but what if the best business case for nutsloaf turns out to be a vegetarian recipe book? Second, say you figured out the idea can be used by ACoupleOfBlocksAway. You go there and let them taste the nutsloaf. However, to your disappointment they tell you they have no interest in it. Imagine your surprise when only a couple of months later they present their own meatloaf variant – conveniently called nutsbread.
Chessbrough argues that the incentives for open innovation are bigger if the protection for intellectual property becomes stronger. This is a paradox, but it is fairly easy to grasp. If your ideas were badly protected, you would never imagine sharing them with other companies, so it makes open innovation possible. But it is not easy. The nutsloaf example is somewhat simplistic, but it does show that there is a lot of knowledge, creativity and risk management involved in selling or licensing left over innovations. Chesbrough offers some valuable insights in how you can approach these challenges, which I will discuss in a later post. In a third post about this book, I will discuss how web API’s relate to the ideas of open innovation.
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Tags: Business Model, Chesbrough, Google, Innovation, Intelectual Property, IP, Open Business Models, Open Innovation