Customer Reviews

Open Innovation: The New Imperative for Creating and Profiting from Technology

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I was very disappointed in this book. The title and the buzz about the book lead me to believe that this book was about the revolutionary idea of "open innovation". Open Source, the approach that developed Linux operating system and other software modules and applications, has demonstrated the power of a loose collaboration that operates in an open environment. This book is not about the "open innovation" that is a generalization of the unique approach that worked in Open Source. Instead this book is about running R&D organizations in a more open way - that is balancing internal R&D with the acquisition of the results of external R&D, and the commercialization of internal R&D internally and externally to the company.

I also think that the book could be misleading for at times the author intermixes the words innovation and technology. Yet, we know that there is a lot of capital to be created with innovations that are not based on technology but exploit the changes caused by technology.

And, as a thirty-year veteran of IBM, it was hard to read that the first time that IBM invented "open innovation" was with the advent of the Internet in the mid 1990s. In reality, there were many "open innovation" efforts within IBM as early as 1970 that produced significant revenue.

The author points to the failure of PARC as an R&D failure. I would argue just the opposite. PARC was extraordinarily successful as an R&D effort. Look at how many fundamental innovations relative to personal computers that got developed. It was operational and executive failure that resulting in Xerox's inability to commercialize on what they had. This is not the fault of a "closed innovation" model. The "closed innovation" model created what it was supposed to create.

I also think kit is misleading in a study of this type to lump research and development together into one - R&D. In reality that are four fundamental functions required:

 Research
 Technology Development
 Technology Management
 Product Development

In a good "open R&D" environment, product developers should be free to use the best technologies, subassemblies or even complete products necessary to meet customer needs, stay competitive and return profit to the company. It's the role of technology management to forecast what technologies are going to be needed for what products and acquire or see that the technologies are developed internally to meet the needs of future products. Technology development's role is to identify promising technologies from research regardless of where the research is done and develop that research into useful technologies. Those technologies not used by the company should be sold or exploited in some way outside the company. And, research's role is to identify promising areas of research, conduct that research and communicate the results widely inside and outside the company.

Now this is a giant simplification I know, but this book doesn't offer a completely satisfactory explanation for how R&D should be managed in today's environment either.

Chesbrough begins the book with "Most innovations fail. And, companies that don't innovate die." Later he states, "...innovation is vital for companies of every size in every industry. Innovation is vital to sustain and advance companies' current businesses; it is critical to growing new businesses. It is also a very difficult process to manage." These statements set up the real conundrum of innovation. Pure internal innovation can result in wasted effort and myopia. Pure external innovation can result in the loss of freedom of action with customers. A company should be able to meet their customers needs in the best possible way, and an external innovation strategy can result in access being denied to innovations or innovations just not available.

Chesbrough rightly concludes that what is required is a balance of internal and external innovation, and internal and external commercialization.

The author makes an extremely important point when he writes, "The value of an idea or technology depends upon the business model. There is no inherent value in technology per se. The value is determined instead by the business model used to bring it to market. The same technology taken to market through two different business models will yield different amounts of value."

Chesbrough rightly concludes that what is required is a balance of internal and external innovation, and internal and external commercialization.

The author makes an extremely important point when he writes, "The value of an idea or technology depends upon the business model. There is no inherent value in technology per se. The value is determined instead by the business model used to bring it to market. The same technology taken to market through two different business models will yield different amounts of value."

One of the most valuable portions of the book deals with the concept of a "business model", an often used term, but infrequently defined. "The functions of a business model are as follows:

1. To articulate the value proposition, that is, the value created for users by offering based on the technology
2. To identify market segments, that is, the users to whom the technology is useful and the purpose for which it is used
3. To define the structure of the firm's value chain, which is required to create and distribute the offering, and to determine the complementary assets needed to support the firm's position in this chain
4. To specify the revenue generation mechanisms for the firm, and estimate the cost structure and target margins of producing the offering, given the value proposition and value chain structure chosen
5. To describe the position of the firm within the value network linking suppliers and customers, including identification of potential complementary firms and competitors
6. To formulate the competitive strategy by which the innovating firm will gain and old advantage over rivals."

Chesborough points out that, "An inferior technology with a better business model will often trump a better technology commercialized through an inferior business model." I agree with this completely. It means that technologists have to learn a new language, the language of the business model, to introduce their technology to a company. "Constructing a business model requires managers to deal with a significant amount of complexity and ambiguity", something most managers and technologists don't handle vary well.

To be a company that successfully innovates requires new levels of skills and abilities from its innovators and an open approach to innovation.

As we have come to expect from Harvard's Professor Chesbrough, Open Innovation is a wealth of insight and knowledge in how organizations can transform themselves by blending the best of their internal know-how and external sources of perspectives. Beginning with an interesting historical vantage point, Chesbrough introduces us to innovation structures as they have evolved at the beginning of the twentieth century, through the establishment of central research & development facilities and beyond. It was historian Alfred Chandler who first researched the economies of scale that resulted from the internal research & development facilities. As it points out in the book, `these R&D facilities were so successful in extracting more efficiency out of increased understanding that they created natural monopolies in many leading industries, or economies of scope'. But many erosion factors have weathered these fortresses of knowledge, and now Chesbrough maintains that innovations, however clever, are worth nothing until a viable business model is found to exploit them.

The function of a business model, according to the author and colleague Richard Rosenbloom, is to: articulate the value proposition; identify a market segment; define the structure of the firm's value chain; estimate the cost structure and margin, describe the position of the firm within the value network and to formulate the competitive strategy of the offering. So invention is not enough. Organizations most follow the path to commercialization, but that route often means it must work collaboratively with many others. This approach has many ramifications on company structure and ways of working. It is hard for organizations (and their leaders) to work on having core-differentiated capabilities, while still being open with their value network. Therefore, this leads ManyWorlds to assume that those things, which are seen as true differentiators in mature companies, must move away from a specific product advantages and more toward process differentiating capabilities. While there is always a role for product innovators, the model they operate under is not usually scaleable, and companies often grow into either `economies of scale' or `economies of scope'. But finding and developing that all important part of the value network becomes a crucial skill in itself.

Open Innovation is a truly excellent book that a review cannot do justice to. With detailed case studies on Xerox (and spin outs), Intel and examples from many other companies, Chesbrough has written an insightful and timely work that draws many threads together. Executives who want to explore how facets of innovation, whether internally or externally motivated, sourced or executed, would not find a better read than Open Innovation.

Having been "grist" in the Xerox mill that Chesbrough covers (he interviewed me in 1997), I can attest to the thoroughness of his research into why Xerox didn't capitalize on the inventions of PARC. Chesbrough goes way beyond the Word template journalist seem to have for articles about PARC. Rather than pointing at the usual suspects of senior managers with no clue about innovation or research types with no clue about business, Chesbrough looks to the broader historical and social context for explanations.

After examining changes in the knowledge landscape---e.g. mobility of high-skill high-knowledge people and rise of venture capital to grease exploration of high-risk high-reward ideas---Chesbrough arrives at the necessity of a shift from a closed model of innovation based on tight control to an open model based on enabling the free flow of ideas for its benefits and capturing what value can be viably captured. Besides Xerox, he looks at IBM, Intel, and Lucent in detail and many others including Microsoft, Cisco, and Merck to explore the open innovation model and how to transition.

The book reads well, the years and years of research and detailed case studies don't get in the way. Beyond direct application to large corporations, the model of open innovation has significant implications for academia, government research and policy, and innovation everywhere. Even having thought about the issues covered for years, I see the book having immediate impact on my own actions.

In general reading `open innovation' is inspirational and interesting. It seems to be good researched and it is easy to read without hurting my intellect. It basically presents the story of the failure of and subsequent changes in the research strategy of Xerox, IBM and AT&T and contrasts this with Intel's successful strategy of concentration on process and product innovation instead of research. Chesbrough neatly conveys the basic argument that large companies have to open their research departments and include partners outside the firm as sources of new technology. Research findings that do not fit into the firm's business model should be realised in new ventures. The firm stories, based mainly on Harvard Business School cases, certainly offer some insights for managers of large corporations.

As an academic however, I have some reservations. Though the book is better than other business books, it follows the same pattern: find a catchy expression (open innovation), declare a paradigm shift, present some case stories that are supposedly representative and take some short cuts towards generalizations. IBM and AT&T are hardly representative for the whole industry. This might be important since there are certainly examples of highly profitable companies that would rather fit into the `closed innovation' model that the author declares dead. Secondly, it is not totally clear that open innovation model is really a new paradigm. At the beginning of the last century (according to the author the origin of the closed innovation model) many European companies took advantage of innovations from universities and public research labs (organic chemistry, x-ray). And there were already complex new technologies that required the interplay of a variety of partners and totally new business models (electricity supply, nuclear energy, air transportation). Many companies published their research findings and licensed their technologies, eg to Japan, which they later regretted.

Though I mainly share the authors hypothesis, I wished promising management ideas would in the end be supported by statistical evidence and not stop with case studies and a well received book.

I recently re-read Henry Chesbrough's Open Business Models and then this book, first published in 2003. In the earlier work, Chesbrough explains that a business model "performs two important functions: it creates value and it captures a portion of that value. It creates value by defining a series of activities from raw materials through to the final consumer that will yield a new product or service with value being added throughout the various activities. The business model captures value by establishing a unique resource, asset, or position within that series of activities, where the firm enjoys a competitive advantage."

Having thus established a frame-of-reference, Chesbrough continues: "An open business model uses this new division of innovation labor - both in the creation of value and in the capture of a portion of that value. Open models create value by leveraging many more ideas, due to their inclusion of a variety of external concepts. Open models can also enable greater value capture, by using a key asset, resource, or position not only in the company's own business model but also in other companies businesses."

What we have in Open Innovation is a development of this concept in much greater depth. As Chesbrough explains, what he characterizes as "Closed Innovation" has a number of implicit rules such as "The company that gets an innovation to market first will usually win" and "We should control our intellectual property, so that our competitors don't profit from our ideas." As a result of several "erosion factors" that have undermined its logic, Chesbrough asserts, the Closed Innovation paradigm is rapidly becoming obsolete. (Please see Table 1-4, "Contrasting Principles of Closed and Open Innovation," on Page xxvi in the Introduction.) "When the innovation context shifts from Closed to Open, the process of innovation must change as well."

Chesbrough carefully organizes his material within nine chapters. In the first, he examines one of the most familiar examples of a company (Xerox Corporation) that selected technologies from its research laboratory (Palo Alto Research Center) that fit its business model, and rejected others. Apple was among the major beneficiaries of that process. "Xerox's management of its PARC technologies illustrates in a nutshell the transition from Closed Innovation to Open Innovation. Chesbrough examines the Closed Innovation Paradigm is analyzed in Chapter 2 and the Open Innovation Paradigm in Chapter 3, then offers a business model in Chapter 5 that illustrates how to connect internal and external innovation. For me, some of the most valuable material in the book is provided in this chapter. Then in the next three chapters, Chesbrough focuses on three major corporations: IBM and its transformation from Closed to Open Innovation (Chapter 5), Open Innovation at Intel, (Chapter 6), and the New Ventures Group within Lucent Technologies organization (Chapter 7).

In the last two chapters, Chesbrough first shifts his attention to a critically important subject, the management of intellectual property (IP) in the innovation process. "In a world of abundant knowledge, companies should be active buyers - and active sellers of IP." Earlier in his book, Chesbrough had explained why ideas that are not readily used could be lost. They and the people who create them "no longer can be warehoused until the companies' own businesses are ready to make use of them. Companies that do not use their ideas with alacrity risk losing them - and the people who thought of them - to outside organizations." Of course, as Chesbrough explains in Chapter 4, the value of an idea is determined by the given business model. "There is no inherent value in a technology per se. The value is determined instead by the business model used to bring it to market." Apple gratefully embraced technologies that Xerox had rejected.

How to complete the transition to a more Open Innovation system? Chesbrough responds to that question in the last chapter, providing a number of strategies and tactics. He recommends devising a strategic map that identifies the given organization's recent innovative ideas as well as those within its industry. On Page 178, he provides a list of questions to ask while completing the map, a document best viewed as "a work in progress." He then offers rock-solid advice on how to proceed with the "roadmap." As I absorbed and digested Chesbrough's brilliant insights on these and other key business issues prompted me to recall my own involvement with a number of organizations that struggled - with mixed success - to complete that process. I now presume to share some of the most important lessons I learned:

1. When designing and implementing an "open" business model, the first requirement is that everyone involved has both an "open" mindset (i.e. receptive to new ideas, whatever their source may be) and is not only willing but also eager to collaborate with others within and beyond her or his own organization. So-called "conventional wisdom" is often a justification for defending the status quo.

2. When setting objectives, focus on the most serious problems to solve and on the most important questions to answer.

3. With regard tracking progress, measure only what really matters...and do so with accuracy and consistency. Meeting deadlines, for example, as well as first-pass yield and cycle time. Be especially alert for variances.

4. Have "open" communication, cooperation, and collaboration at all levels and in all areas throughout what should be viewed as an extended enterprise. There is so much of value to be learned from associates, of course, (especially in other departments), but also from customers, vendors, strategic allies, and other stakeholders within the given value chain. Moreover, Chesbrough cites examples of situations in which valuable information was obtained (legally) from competitors.

5. Open Innovation is a journey of discovery. Therefore, view all problems as learning opportunities. Focus on determining their root causes rather than merely responding to their symptoms.

The final paragraph of the Introduction offers an appropriate conclusion to this commentary. By then, Chesbrough has shared a new vision of the innovation process. "This vision eagerly seeks external knowledge and ideas, even as it nurtures internal ones. It utilizes valuable ideas from whatever source in advancing a company's own business, and it places the company's own ideas in other companies' businesses. By opening itself up to the world of knowledge that surrounds it, the twenty-first-century corporation can avoid the innovation paradox that plagues so many firms' R&D activities today. In so doing, the company can renew its current business and generate new business. For the innovative company in a world of abundant knowledge, today can be the best of times."

Innovation is a critical driver for the competitiveness of firms and the overall economy. It is also a difficult and messy process to understand. I have read most of the well-known books on innovation as I am fascinated with the topic. Chesbrough brings a coherent and useful point of view into this arena. The contribution of this book is mostly synthesizing a number of principles to provide a useful mental model for managing innovation. It does not present some new ground-breaking theory that knocks your socks off.

For example, the author uses the metaphors of "playing chess" and "playing poker" to describe the invention process. If everything about the technical and market application is known, playing chess (i.e., making careful, methodical moves based on having all available knowledge) is appropriate. However, most innovation occurs in an uncertain environment with plenty of market and technology risk. In such cases, you need to play poker. This means there are multiple hands to be played, you need to be ready to react to new information (newly exposed cards) and you must be willing to toss a hand in when it doesn't pan out.

Chesbrough hits on the idea that successful innovation often requires innovation within the business model. In fact, new ideas shoved into the existing old business model is a classic way for innovations to fail. This is one reason why new firms are often the first ones to embrace radical ideas that change industries.

This book is not just conceptual models dreamed up by an academic. The author uses plenty of real world examples from companies such as Xerox, IBM and Intel.

I highly recommend this book for your innovation management bookshelf.

Open Innovation is the only other book besides Leifer and McDermott's "Radical Innovation" that I feel compelled to keep with me on hand at all times. It is practical, useful, and the arguments - backed by excellent deep research - is fresh and compelling. There are a lot of gurus out there saying the same old things. Chesbrough is the future. He sees where things are going, and Open Innovation is squarely focused on the force that is driving the transformation of corporate governance right now and over the next five-ten years.

This book came across as a good wake-up call for those business and technology leaders that are still romantically involved with the notion that fundamental research and ownership of the results remains as the way to establish a competitive advantage. The book reminded me of Covey's much earlier description of the journey to effectiveness through the desirable transition from independence to interdependence. It seems, though, that the proverbial pendulum has now swung to the other extreme. In other words, for years the technology function led business development and now business leaders are strongly encouraged to lead technology development. The answer for a sustainable advantage likely lies somewhere in between - through strong collaboration of both functions.

In the field of technology change appears to occur at an ever increasing rate. Through innovation in research and development new breakthroughs occur, new products are brought to market, sales brings in money to fund research and the cycle goes on and on. At least this is the way that it is generally thought to occur. In reality hostile takeovers, IPO bids and the like keep interrupting the cycle. Companies refuse to look outside of themselves for innovative ideas or the application of their technology to new ventures. So the system is actually a closed cycle within the company instead of an open one the embraces the value of processes, people, and others outside of the company.

Business innovations create potential but do not have value in and of themselves. It is the business model that turns innovation into profits. We have all seen inferior products bypass superior ones because of a better business model. Unfortunately for the consumer, it is not at all uncommon.

So, the business model itself defines the profit received from an innovation. Why? Because the business model is the single most important factor in determining a suitable market for the innovation, costs, profit margins, and competitive position. The business model determines whether the company will take advantage of all opportunities including those outside itself or just utilize those opportunities that they can produce internally. The authors detail several case studies that point out the difference between closed and open innovation and the results of each very clearly.

The finishing touch to the book is that it clearly details the path to open innovation and how to move a company from a closed mindset to an open one. This is a highly recommended read for anyone wanting to take advantage of technology to increase their profits.

To put my response in context, I work with startup companies every day so I'm continually exposed to the importance of IP and business models and markets and markets and suppliers and distributors... many of the elements that that turn a cool idea or a cool technology into a profitable product.

From that perspective, both this book and Open Business Models are a disappointment. As I would suggest that you only read one (and in most cases the latter), I'll briefly review both here.

Open Innovation is supposed to bring attention to changing industry landscape. In this regard, it does a decent job to point out the trends in innovation and partnerships that are likely to drive companies forward. If you've missed out on IBM's reinvention of itself and are finding increasing pressures on your business, Open Innovation might give you some insight. Unfortunately, the content seems to border on obvious and, since it's thoroughly revisited in the latter book, it doesn't really make sense to read Open Innovation.

Marginally better, Open Business Models offers some simple frameworks or ideas about how to classify companies (based on their embracing of innovation and open innovation) and how companies move from one to another. While offering few or no "aha" moments, Open Business Models paints a decent roadmap of the transition, identifying pitfalls and opportunities. If you were responsible for this process in your company, it could help you understand where you are and how to get where you need to be.

If you're just looking for an insightful read and have any passing knowledge of open business models, I wouldn't bother with either. If you're responsible for this process in your company, try Open Business Models as it could be rewarding. Unless you're devouring everything you can find on the "open innovation" subject, I wouldn't really bother with Open Innovation.