ARTICLE 1
Title: The Era of Open Innovaton
Author Chresbrough (2003)
:
The Different Modes of Innovation
Indeed, many companies have been defining new strategies for exploiting the principles of open
innovation, exploring ways in which external technologies can fill gaps in their current businesses and
looking at how their internal technologies can spawn the seeds of new businesses outside the current
organization. In doing so, many firms have focused their activities into one of three primary areas:
funding, generating or commercializing innovation.
Funding Innovation
Two types of organizations — innovation investors and benefactors— are focused primarily on
supplying fuel for the innovation fire. The original innovation investor was the corporate R&D
budget but now a wide range of other types has emerged, including venture capital (VC) firms, angel
investors, corporate VC entities, private equity investors and the Small Business Investment
Companies (SBICs), which provide VC to small, independent businesses and are licensed and
regulated by the U.S. Small Business Administration. Their capital helps move ideas out of
corporations and universities and into the market, typically through the creation of startups.
,Innovation benefactors provide new sources of research funding. Unlike investors, benefactors focus
on the early stages of research discovery. Some companies are devoting a portion of their resources to
playing the role of benefactor. By funding promising early-stage work, they get a first look at the ideas
and can selectively fund those that seem favorable for their industry.
Generating Innovation
There are four types of organizations that primarily generate innovation: innovation explorers,
merchants, architects and missionaries. Innovation explorers specialize in performing the discovery
research function that previously took place primarily within corporate R&D laboratories.
1. Interestingly, a number of innovation explorers evolved as spinoffs of laboratories that used
to be a part of a larger organization. Just a year ago, for example, PARC became a separate,
independent entity from Xerox. Similarly, Telcordia Technologies was formed from the
divestiture of the Bell System and is now home to about 400 researchers with a broad range of
expertise, from software engineering to optical networking
2. Innovation merchants must also explore, but their activities are focused on a narrow set of
technologies that are then codified into intellectual property and aggressively sold to (and
brought to market by) others. In other words, innovation merchants will innovate but only
with specific commercial goals in mind, whereas explorers tend to innovate for innovation’s
sake.
3. Innovation architects provide a valuable service in complicated technology worlds. In order
to create value for their customers, they develop architectures that partition this complexity,
enabling numerous other companies to provide pieces of the system, all while ensuring that
those parts fit together in a coherent way. To be successful, innovation architects must
establish their systems solution, communicate it, persuade others to support it and develop it in
the future. They must also devise a way to capture some portion of the value they create,
otherwise they will find it impossible to sustain and advance their architecture.
4. Innovation missionaries consist of people and organizations that create and advance
technologies to serve a cause. Unlike the innovation merchants and architects, they do not
seek financial profits from their work. Instead, the mission is what motivates them. Here, user
groups help define how a particular software program will evolve.
Commercializing Innovation
Lastly, two types of organization are focused on bringing innovations to market: innovation
marketers and one-stop centers.
1. Innovation marketers often perform at least some of the functions of the other types of
organization, but their defining attribute is their keen ability to profitably market ideas, both
their own as well as others’.To do so, marketers focus on developing a deep understanding of
the current and potential needs in the market and this helps them to identify which outside
ideas to bring in-house. Most of the drugs that are currently in Pfizer’s pipeline, for instance,
originated outside the company.
2. Innovation one-stop centers provide comprehensive products and services. They take the
best ideas (from whatever source) and deliver those offerings to their customers at competitive
prices. Like innovation marketers, they thrive by selling others’ ideas, but are different in that
they typically form unshakable connections to the end users, increasingly managing a
customer’s resources to his or her specifications.
In short, firms that can harness outside ideas to advance their own businesses while leveraging their
,internal ideas outside their current operations will likely thrive in this new era of open innovation.
ARTICLE 2
Title: Why Companies Should Have Open Business Models
Author Chresbrough (2007)
:
Using outside technologies to develop products and licensing internal intellectual property to external
parties will carry a company only so far. The next frontier in innovation is to open the business model
itself.
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.
An open business model is one 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.
Why Open Business Models are necessary:
1. Dominant logic within firms. Different companies possess different assets, resources and
market positions, and each has a unique history. Because of that, companies look at
opportunities differently. They will quickly recognize ideas that fit the pattern that has proven
successful for them in the past, but they will struggle with concepts that require an unfamiliar
configuration of assets, resources and positions. With innovation markets, ideas can flow out
of places where they do not fit and find homes in companies where they do.
2. Innovation processes are highly inefficient nowadays. In highly inefficient markets a good
deal of potentially valuable trade in innovation does not occur. The costs are so high and the
potential value so difficult to perceive that innovation often sits “on the shelf,” unused. One
way to quantify this waste is to look at a company’s patent utilization rate — the number of
patents that the firm uses in its business divided by the total number of patents that it owns.
3. An important factor spurring the process of open innovation is the rising cost of technology
development in many industries.
4. But there’s another force at play: the shortening life cycles of new products. In the computer
industry during the early 1980s, hard disk drives would typically ship for four to six years,
after which a new and better product became available. By the late 1980s, the expected
shipping life had fallen to two to three years. By the 1990s, it was just six to nine months.
, As a result of both trends — rising development
costs and shorter product life cycles —
companies are finding it increasingly difficult to
justify investments in innovation. (See “The
Economic Pressures on Innovation.”) Open
business models address both effects. It attacks
the cost side of the problem by leveraging
external research-and-development resources to
save time and money in the innovation process.
Open business models also attack the revenue
side. P&G, for instance, is creating new brands
by licensing technologies from other companies
around the world, resulting in products like the
SpinBrush, a battery-operated toothbrush, which
generated first year sales of $200 million. And
P&G is also getting money from licensing its
technologies to other firms.
The combination of leveraged cost and time savings with new revenue opportunities confers powerful
advantages for companies willing to open their business models. 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. The result is that
innovation becomes economically attractive again, even in a world of shorter product life cycles.
To experiment with different products without risking any damage to its consumer brand, the
manufacturer has created a “white box” brand that is not advertised, is not supported and has no
obvious connection to the company.
Making the Transition
First, the business model must be adjusted or rebuilt to handle significant volume. Many business
models that work well when only a small number of highly trained people are involved can easily
break down when new layers of administration are needed to manage a much larger number of more
general workers. If certain processes cannot be automated or standardized, the model may not be able
to handle large increases in activity without resulting in a severe degradation of quality.
Second, the business model must obtain “buy in” from important constituencies before being
rolled out across the company. Scaling up a business model requires much more funding and far
greater organizational commitment than a small experiment does, and those resources must come from
somewhere. This often creates “losers” in the organization — groups whose budgets are cut to free up
