Open Innovation: The New Imperative for Creating and Profiting from Technology
Authors: Henry Chesbrough, Henry Chesbrough
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Overview
In a world of abundant knowledge, the traditional Closed Innovation model, where companies rely primarily on their own internal R&D, is no longer sufficient. This book introduces the concept of Open Innovation, a paradigm that emphasizes leveraging external knowledge and collaborating with outside partners.
I explore the historical context of innovation, starting with Xerox PARC’s successes and failures, to illustrate the limitations of the Closed Innovation model and the potential of Open Innovation. I then present the core principles of Open Innovation, arguing that companies should access and utilize external knowledge, including ideas from customers, suppliers, universities, and even competitors.
I also provide practical guidance on how to transition to an Open Innovation model. This includes assessing recent innovation activities, building an innovation roadmap, filling gaps with external technologies, funding start-ups, and collaborating with universities. I delve into the importance of the business model in capturing value from innovation, showing how the right business model can unlock the latent value of a technology. The book concludes with a discussion of the role of intellectual property (IP) management in Open Innovation. I show that companies should manage IP not only to protect their own innovations, but also to leverage external IP and profit from others’ use of the company’s ideas. Government policy also plays a role in supporting Open Innovation by encouraging technology transfer and fostering a transparent and predictable IP landscape.
This book is intended for managers and executives in technology-intensive industries, as well as researchers, policymakers, and anyone interested in understanding the changing landscape of innovation. It offers practical frameworks and tools to help organizations thrive in a world of abundant knowledge. Open Innovation is not just a new way of doing R&D; it’s a new way of thinking about innovation itself.
Book Outline
1. Xerox PARC
Xerox PARC, a research center established by Xerox, produced groundbreaking innovations such as the graphical user interface, bit-mapped screen, Ethernet, and PostScript, technologies that would become central to the personal computer and communications revolution.
Key concept: The graphical user interface originated at PARC. The bit-mapped screen, which replaced the green ASCII characters on terminals, was also born there. The Ethernet networking protocol was developed there, as were other, higher-speed networking protocols.
2. The Closed Innovation Paradigm
The Closed Innovation paradigm, the dominant model for industrial R&D in the 20th century, emphasizes self-reliance and vertical integration. Companies control every step of the innovation process, from discovery to commercialization, within their own organizational boundaries.
Key concept: The Closed Innovation paradigm: The corporation sought to discover new breakthroughs; develop them into products; build the products in its factories; and distribute, finance, and service those products—all within the four walls of the company.
3. The Open Innovation Paradigm
The Open Innovation paradigm recognizes that valuable ideas can originate from outside a company’s walls and that external paths to market can be as effective as internal ones. It emphasizes accessing and leveraging external knowledge and collaborating with outside partners.
Key concept: Open Innovation means that valuable ideas can come from inside or outside the company and can go to market from inside or outside the company as well.
4. The Business Model
A business model articulates the value proposition of a technology, identifies the target market, defines the value chain, and specifies revenue generation mechanisms, cost structure, and competitive strategy.
Key concept: To articulate the value proposition, that is, the value created for users by the offering based on the technology
5. From Closed to Open Innovation
IBM’s transformation from a Closed to Open Innovation model involved embracing external technologies and unbundling its value chain. The company moved away from vertical integration and began leveraging external knowledge and partnerships to create and capture value.
Key concept: IBM also created a technical architecture that outsourced the microprocessor and operating-system portions of the value chain—to Intel and Microsoft, respectively.
6. Open Innovation @ Intel
Intel’s approach to innovation focuses on manufacturing excellence and rapid technology transfer rather than basic research. It leverages external research, collaborates with universities, and actively invests in start-ups to access and integrate external knowledge.
Key concept: “The point is to make excellent chips, not to publish brilliant papers.”
7. Creating New Ventures out of Internal Technologies
Lucent’s New Ventures Group (NVG) was created to commercialize internal technologies that didn’t align with existing business units. The NVG acted as a hybrid venture capital organization and business development function, creating new ventures and seeking external partnerships.
Key concept: The NVG was created to commercialize any Bell Laboratories technologies that did not fit with any of Lucent’s established businesses.
8. Business Models and Managing Intellectual Property
Business models and intellectual property (IP) management are intertwined. The Closed Innovation paradigm prioritizes controlling and protecting IP, while Open Innovation emphasizes leveraging both internal and external IP through strategic licensing and partnerships. The value of IP depends greatly on the business model used to commercialize the underlying technology.
Key concept: Companies act as contract research organizations (CROs) that supply information and analysis of biological compounds to pharmaceutical manufacturers.
9. Making the Transition
Transitioning to Open Innovation requires companies to assess their current innovation activities, identify gaps and blind spots in their roadmap, leverage external technologies, and cultivate relationships with universities and venture capitalists. Government policy also plays a role in supporting Open Innovation by funding basic research, facilitating technology transfer, and fostering a transparent and predictable IP landscape.
Key concept: Open Innovation will enable knowledge and ideas to find greater use, in a wider variety of possibilities and configurations, than was previously possible.
Essential Questions
1. What is the Closed Innovation paradigm and why did it begin to falter?
The Closed Innovation paradigm, dominant throughout the 20th century, relied on self-reliance and vertical integration. Companies controlled the entire innovation process, from idea generation to commercialization, within their boundaries. This approach was successful in an era of relatively scarce and slow-moving external knowledge. However, Xerox’s experience with PARC revealed the limitations of this paradigm. Despite groundbreaking innovations like the GUI and Ethernet, Xerox struggled to capture value from these technologies because they didn’t align with its existing business model and market focus. Many of these innovations were ultimately commercialized by spin-off companies and other firms like Apple and Microsoft, highlighting the need for a new approach to innovation.
2. What factors drive the shift towards Open Innovation?
Open Innovation recognizes the increasing availability and mobility of skilled workers, the rise of venture capital, and the growing capabilities of external suppliers. These factors erode the knowledge monopolies of large firms and create opportunities for smaller companies and start-ups to commercialize innovative technologies. In an Open Innovation model, ideas and knowledge can flow into and out of the company, and companies can leverage external resources to create and capture value from their innovations. This paradigm requires a shift in mindset, embracing collaboration, licensing, and external partnerships as integral parts of the innovation process.
3. What is the role of the business model in innovation, and how does it relate to Open Innovation?
A business model serves as a framework to connect technological potential with economic value. It articulates the value proposition of a technology, identifies the target market, defines the value chain required to deliver the offering, and specifies revenue mechanisms, cost structure, target margins, and competitive strategy. Xerox’s inability to find the right business model for many PARC technologies led to missed opportunities, while the success of spin-offs like 3Com and Adobe stemmed from their ability to develop innovative business models tailored to the new technologies and markets. In an Open Innovation paradigm, companies need to be flexible and willing to experiment with different business models to capture the full potential of their innovations, internal or external.
4. How can established companies transition from Closed to Open Innovation, and what are some real-world examples?
IBM, Intel, and Lucent provide diverse examples of transitioning towards Open Innovation. IBM, after a near-death experience, embraced external technologies and unbundled its value chain, licensing its IP and even becoming a chip foundry for other firms. Intel, focused on manufacturing excellence, leverages external research and actively invests in start-ups to access knowledge and extend its market ecosystem. Lucent’s NVG created new ventures from internal technologies, though it ultimately faced challenges in aligning incentives and measuring strategic benefits. These examples illustrate different paths to Open Innovation, highlighting the need for companies to adapt their approach based on their specific context and capabilities.
1. What is the Closed Innovation paradigm and why did it begin to falter?
The Closed Innovation paradigm, dominant throughout the 20th century, relied on self-reliance and vertical integration. Companies controlled the entire innovation process, from idea generation to commercialization, within their boundaries. This approach was successful in an era of relatively scarce and slow-moving external knowledge. However, Xerox’s experience with PARC revealed the limitations of this paradigm. Despite groundbreaking innovations like the GUI and Ethernet, Xerox struggled to capture value from these technologies because they didn’t align with its existing business model and market focus. Many of these innovations were ultimately commercialized by spin-off companies and other firms like Apple and Microsoft, highlighting the need for a new approach to innovation.
2. What factors drive the shift towards Open Innovation?
Open Innovation recognizes the increasing availability and mobility of skilled workers, the rise of venture capital, and the growing capabilities of external suppliers. These factors erode the knowledge monopolies of large firms and create opportunities for smaller companies and start-ups to commercialize innovative technologies. In an Open Innovation model, ideas and knowledge can flow into and out of the company, and companies can leverage external resources to create and capture value from their innovations. This paradigm requires a shift in mindset, embracing collaboration, licensing, and external partnerships as integral parts of the innovation process.
3. What is the role of the business model in innovation, and how does it relate to Open Innovation?
A business model serves as a framework to connect technological potential with economic value. It articulates the value proposition of a technology, identifies the target market, defines the value chain required to deliver the offering, and specifies revenue mechanisms, cost structure, target margins, and competitive strategy. Xerox’s inability to find the right business model for many PARC technologies led to missed opportunities, while the success of spin-offs like 3Com and Adobe stemmed from their ability to develop innovative business models tailored to the new technologies and markets. In an Open Innovation paradigm, companies need to be flexible and willing to experiment with different business models to capture the full potential of their innovations, internal or external.
4. How can established companies transition from Closed to Open Innovation, and what are some real-world examples?
IBM, Intel, and Lucent provide diverse examples of transitioning towards Open Innovation. IBM, after a near-death experience, embraced external technologies and unbundled its value chain, licensing its IP and even becoming a chip foundry for other firms. Intel, focused on manufacturing excellence, leverages external research and actively invests in start-ups to access knowledge and extend its market ecosystem. Lucent’s NVG created new ventures from internal technologies, though it ultimately faced challenges in aligning incentives and measuring strategic benefits. These examples illustrate different paths to Open Innovation, highlighting the need for companies to adapt their approach based on their specific context and capabilities.
Key Takeaways
1. Embrace external knowledge
The traditional model of centralized, internal R&D is no longer sufficient in a world of widely distributed knowledge. Companies must actively seek and leverage external knowledge sources, such as universities, start-ups, and even competitors. This external focus allows companies to access cutting-edge research, specialized expertise, and diverse perspectives, accelerating the pace of innovation and potentially leading to breakthrough discoveries that would have been impossible to achieve solely through internal efforts. Building relationships and partnerships with external organizations becomes a critical capability for success in an Open Innovation paradigm.
Practical Application:
An AI company could partner with a university research lab specializing in natural language processing to gain access to cutting-edge research and talent. The company could sponsor research projects, offer internships, and potentially license or acquire resulting technologies, integrating them into their AI platform.
2. Become strategic buyers and sellers of IP
Companies should not only be buyers of IP but also strategic sellers. Licensing out technologies, even to competitors, can generate revenue, expand the market for the technology, and provide valuable feedback from diverse applications. This approach can be particularly beneficial for technologies that do not directly fit with a company’s core business model, allowing them to capture value that would otherwise be lost. In an Open Innovation context, managing IP strategically involves finding multiple paths to market for a technology and leveraging external commercialization efforts.
Practical Application:
An AI start-up developing a new machine learning algorithm could offer non-exclusive licenses to larger tech companies, allowing them to use the algorithm in their products while retaining the right to use and further develop the technology. This strategy generates revenue, fosters wider adoption of the algorithm, and provides valuable feedback from multiple applications.
3. Leverage venture capital and start-ups as “pilot fish”
Venture capitalists and the start-ups they fund act as “pilot fish”, experimenting with new technologies and business models in nascent markets. Established companies can learn from these experiments and adapt their strategies accordingly. Collaborating with or even acquiring start-ups can provide valuable insights and accelerate the adoption of new technologies. This approach also helps companies mitigate the risks associated with venturing into unknown markets by leveraging the agility and entrepreneurial spirit of smaller firms.
Practical Application:
An AI product team developing a chatbot platform could create a “pilot fish” project by partnering with a smaller company to test the platform in a specific niche market, such as customer service for online retailers. This allows for rapid testing and iteration of the business model and technology in a real-world setting, gathering valuable feedback before a wider rollout.
1. Embrace external knowledge
The traditional model of centralized, internal R&D is no longer sufficient in a world of widely distributed knowledge. Companies must actively seek and leverage external knowledge sources, such as universities, start-ups, and even competitors. This external focus allows companies to access cutting-edge research, specialized expertise, and diverse perspectives, accelerating the pace of innovation and potentially leading to breakthrough discoveries that would have been impossible to achieve solely through internal efforts. Building relationships and partnerships with external organizations becomes a critical capability for success in an Open Innovation paradigm.
Practical Application:
An AI company could partner with a university research lab specializing in natural language processing to gain access to cutting-edge research and talent. The company could sponsor research projects, offer internships, and potentially license or acquire resulting technologies, integrating them into their AI platform.
2. Become strategic buyers and sellers of IP
Companies should not only be buyers of IP but also strategic sellers. Licensing out technologies, even to competitors, can generate revenue, expand the market for the technology, and provide valuable feedback from diverse applications. This approach can be particularly beneficial for technologies that do not directly fit with a company’s core business model, allowing them to capture value that would otherwise be lost. In an Open Innovation context, managing IP strategically involves finding multiple paths to market for a technology and leveraging external commercialization efforts.
Practical Application:
An AI start-up developing a new machine learning algorithm could offer non-exclusive licenses to larger tech companies, allowing them to use the algorithm in their products while retaining the right to use and further develop the technology. This strategy generates revenue, fosters wider adoption of the algorithm, and provides valuable feedback from multiple applications.
3. Leverage venture capital and start-ups as “pilot fish”
Venture capitalists and the start-ups they fund act as “pilot fish”, experimenting with new technologies and business models in nascent markets. Established companies can learn from these experiments and adapt their strategies accordingly. Collaborating with or even acquiring start-ups can provide valuable insights and accelerate the adoption of new technologies. This approach also helps companies mitigate the risks associated with venturing into unknown markets by leveraging the agility and entrepreneurial spirit of smaller firms.
Practical Application:
An AI product team developing a chatbot platform could create a “pilot fish” project by partnering with a smaller company to test the platform in a specific niche market, such as customer service for online retailers. This allows for rapid testing and iteration of the business model and technology in a real-world setting, gathering valuable feedback before a wider rollout.
Memorable Quotes
Chapter 3: The Open Innovation Paradigm. 43
“Open Innovation means that valuable ideas can come from inside or outside the company and can go to market from inside or outside the company as well.”
Chapter 1: Xerox PARC. 13
“When you’re targeting your technology to your current business, it’s like a chess game… In a new market, you have to plan your technology entirely differently. You’re not playing chess anymore; now you’re playing poker.”
Chapter 4: The Business Model. 64
“One critical aspect of this process is that technology by itself has no single objective value.”
Chapter 5: From Closed to Open Innovation. 106
“You win by making the best use of internal and external knowledge in a timely way, creatively combining that knowledge in new and different ways to create new products or services.”
Chapter 7: Creating New Ventures out of Internal Technologies. 155
“The companies most able to conduct research are the least able to profit from it.”
Chapter 3: The Open Innovation Paradigm. 43
“Open Innovation means that valuable ideas can come from inside or outside the company and can go to market from inside or outside the company as well.”
Chapter 1: Xerox PARC. 13
“When you’re targeting your technology to your current business, it’s like a chess game… In a new market, you have to plan your technology entirely differently. You’re not playing chess anymore; now you’re playing poker.”
Chapter 4: The Business Model. 64
“One critical aspect of this process is that technology by itself has no single objective value.”
Chapter 5: From Closed to Open Innovation. 106
“You win by making the best use of internal and external knowledge in a timely way, creatively combining that knowledge in new and different ways to create new products or services.”
Chapter 7: Creating New Ventures out of Internal Technologies. 155
“The companies most able to conduct research are the least able to profit from it.”
Comparative Analysis
Open Innovation stands out for its deep dive into the changing landscape of knowledge and its impact on corporate innovation. Unlike Christensen’s focus on disruptive innovation, which often stems from low-end market entrants, Chesbrough highlights the growing importance of external knowledge sources and the need for companies to adapt their innovation processes. While both authors recognize the challenges faced by incumbent firms, Chesbrough offers a more proactive approach by emphasizing collaboration, licensing, and external partnerships. Compared to von Hippel’s work on user innovation, which centers on the role of customers in developing new products, Chesbrough takes a broader perspective by considering the entire ecosystem of innovation and the contributions of various external actors. This book complements these works by providing a comprehensive framework for managing innovation in a world of abundant knowledge, with a particular focus on the strategic use of external technologies and ideas.
Reflection
Open Innovation, though published before the widespread adoption of cloud computing, mobile platforms, and the modern AI boom, provides a prescient framework for navigating the current technology landscape. Its core message of embracing external knowledge and collaboration is even more relevant today, as the pace of technological change accelerates and the barriers to entry decrease. However, the book’s focus on established companies transitioning from Closed to Open Innovation may not fully capture the dynamics of today’s rapidly evolving start-up ecosystem, where Open Innovation is often the default model. Additionally, while the book acknowledges the importance of managing IP, it may underemphasize the challenges of protecting and monetizing IP in an increasingly open and collaborative environment, where technologies can be quickly diffused and reverse-engineered. Despite these limitations, the book’s core concepts remain highly relevant and valuable for companies seeking to thrive in today’s dynamic and interconnected world. Its emphasis on strategic partnerships, external knowledge sourcing, and flexible business models provides a timeless foundation for building successful innovation strategies in the age of AI and beyond. The increasing importance of open-source software and collaborative AI development further reinforces Chesbrough’s central thesis that “not all the smart people work for us.”
Flashcards
What is Open Innovation?
A paradigm that assumes valuable ideas can come from inside or outside the company and can go to market from inside or outside the company as well.
What is Closed Innovation?
A paradigm that assumes that successful innovation requires control and ownership of the entire innovation process, from research to sales.
What is a business model?
A framework that articulates the value proposition, target market, value chain, revenue mechanisms, and competitive strategy of a technology.
What was the “PARC problem”?
Xerox’s failure to fully capture the value of innovations from PARC due to a Closed Innovation mindset and inability to adapt its business model.
What are the key drivers of the shift to Open Innovation?
The increasing availability and mobility of skilled workers, the rise of venture capital, and the growing capabilities of external suppliers.
What is “Copy Exactly”?
Intel’s approach to innovation, prioritizing manufacturing and leveraging external knowledge through university partnerships and strategic investments.
What was Lucent’s New Ventures Group (NVG)?
A Lucent Technologies initiative to commercialize internal technologies not aligned with existing business units.
What is a key insight about managing intellectual property in Open Innovation?
Most patents have little financial value, and the true worth of a patent is determined by its commercialization through a viable business model.
What are key steps to transition to Open Innovation?
Assess current innovation activities, identify gaps and blind spots, leverage external technologies, build relationships with external partners, and adapt the business model.
What is Open Innovation?
A paradigm that assumes valuable ideas can come from inside or outside the company and can go to market from inside or outside the company as well.
What is Closed Innovation?
A paradigm that assumes that successful innovation requires control and ownership of the entire innovation process, from research to sales.
What is a business model?
A framework that articulates the value proposition, target market, value chain, revenue mechanisms, and competitive strategy of a technology.
What was the “PARC problem”?
Xerox’s failure to fully capture the value of innovations from PARC due to a Closed Innovation mindset and inability to adapt its business model.
What are the key drivers of the shift to Open Innovation?
The increasing availability and mobility of skilled workers, the rise of venture capital, and the growing capabilities of external suppliers.
What is “Copy Exactly”?
Intel’s approach to innovation, prioritizing manufacturing and leveraging external knowledge through university partnerships and strategic investments.
What was Lucent’s New Ventures Group (NVG)?
A Lucent Technologies initiative to commercialize internal technologies not aligned with existing business units.
What is a key insight about managing intellectual property in Open Innovation?
Most patents have little financial value, and the true worth of a patent is determined by its commercialization through a viable business model.
What are key steps to transition to Open Innovation?
Assess current innovation activities, identify gaps and blind spots, leverage external technologies, build relationships with external partners, and adapt the business model.