Open

Business
Models
 OPEN BUSINESS MODELS
Def_Pattern No. 5
open business models can be used by compa- [ ref·er·ences ] 109

1
nies to create and capture value by systemati-

PATTERNS
How to Thrive in the New
Innovation Landscape.
cally collaborating with outside partners. Chesbrough, Henry.
2006.
may happen from the “outside-in” by exploit- 2 “The Era of Open
Innovation.”

Chesbrough, Henry.
“inside-out” by providing external parties with Nº 3, 2003.

[ ex·am·ples ]
P&G, GlaxoSmithKilne,
Innocentive
OPEN BUSINESS MODELS

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Open innovation and open business models are two shows that products, technologies, knowledge, and and commercialization processes. The table opposite
terms coined by Henry Chesbrough. They refer to open- intellectual property lying idle inside a company can be illustrates how companies increasingly rely on outside
ing up a company’s research process to outside parties. monetized by making them available to outside parties sources of technology to strengthen their business
Chesbrough argues that in a world characterized by through licensing, joint ventures, or spin-oΩs. Ches- models. “Inside-out” innovation occurs when orga-
distributed knowledge, organizations can create more brough distinguishes between "outside-in" innovation nizations license or sell their intellectual property or
value and better exploit their own research by integrating and “inside-out” innovation. “Outside-in” innovation technologies, particularly unused assets. In this section
outside knowledge, intellectual property, and products occurs when an organization brings external ideas, we describe the business model patterns of firms that
into their innovation processes. In addition, Chesbrough technology, or intellectual property into its development practice open innovation.
 OPEN BUSINESS MODELS
35,1 ,3 (6 2) ,1129 7,21

ORVHG 2SH
The smart people in our field work for us. We need to work with smart people both
inside and outside our company.

PATTERNS
To profit from research and development External R&D can create significant value;
(R&D), we must discover it, develop it, and internal R&D is needed to claim some por-
ship it ourselves. tion of that value.

If we conduct most of the best We don't have to originate the research

research in the industry, we will win. to benefit from it.

If we create the most or the best ideas in If we make the best use of internal and
the industry, we will win. external ideas, we will win.

We should control our innovation We should profit from others' use of our
process, so that competitors don't innovations, and we should buy others'
profit from our ideas. intellectual property (IP) whenever it
advances our own interests.

Source: Adapted from Chesbrough, 2003 and Wikipedia, 2009.

 Procter & Gamble:
OPEN BUSINESS MODELS

Connect & Develop

112
Outside-In
PATTERNS

In June of 2000, amid a continuing slide in

other internal r&d
Procter & Gamble’s share price, longtime P&G company's ip
executive A.G. Lafley got the call to become the
technology
consumer product giant’s new CEO. To rejuve- entrepreneurs
nate P&G, Lafley resolved to put innovation back 1 Technology entrepreneurs are senior scien- internet platforms
at the company’s core. But instead of boosting tists from P&G business units who systemati- your-encore
cally develop relationships with researchers external
R&D spending, he focused on structuring a scientists
at universities and other companies. They also
new innovation culture: one that moved from retired internal r&d
act as “hunters” who scan the outside world scientists
an internally focused R&D approach to an open for solutions to internal P&G challenges.
R&D process. A key element was a “Connect &
Develop” strategy aimed at exploiting internal 2 Through Internet platforms, P&G connects
research through outside partnerships. Lafley with expert problem-solvers around the world. leveraging internal r&d
Platforms such as InnoCentives (see p. 114)
set an ambitious goal: create 50 percent of P&G’s
allow P&G to expose some of its research prob-
innovations with outside partners at a time when
lems to non-P&G scientists around the globe.
that figure was closer to 15 percent. The com- Respondents earn cash prizes for developing
pany surpassed that goal in 2007. Meanwhile, successful solutions.
R&D productivity had soared 85 percent, even
though R&D spending was only modestly higher 3 P&G solicits knowledge from retirees
compared to when Lafley took over as CEO. through YourEncore.com, a platform the com-
pany launched specifically to serve as an open
In order to link its internal resources and
innovation “bridge” to the outside world.
R&D activities with the outside world, Procter
& Gamble built three “bridges” into its busi-
ness model: technology entrepreneurs, Internet
platforms, and retirees.
GlaxoSmithKline’s

OPEN BUSINESS MODELS

Patent Pools
113
Inside-Out

PATTERNS
The inside-out approach to open innova-
tion ordinarily focuses on monetizing unused acquisition
internal assets, primarily patents and technol- retention
ogy. In the case of GlaxoSmithKline’s “patent
ip for outside
pool” research strategy, though, the motivation underserved
diseases researchers
was slightly diΩerent. The company’s goal was
to make drugs more accessible in the world’s
poorest countries and to facilitate research Unused internal ideas,
patent pools
into understudied diseases. One way to achieve R&D, and intellectual
this was to place intellectual property rights property related to
diseases in poor nations
relevant to developing drugs for such diseases
have substantial value
into a patent pool open to exploration by other license fees
when “pooled”
researchers. Since pharmaceutical companies
focus mainly on developing blockbuster drugs,
intellectual property related to less-studied
diseases often lies idle. Patent pools aggregate
intellectual property from diΩerent rights-
holders and makes it more accessible. This helps
prevent R&D advances from being blocked by
a single rights-holder.
 The Connector:
OPEN BUSINESS MODELS

Innocentive
114

Innocentive
PATTERNS

Companies seeking insights from external

researchers incur substantial costs when trying platform access to a
management broad network
to attract people or organizations with knowl- of scientist
"solvers" online profiles
edge that could solve their problems. On the acquire solvers "seekers"
& seekers (company)
other hand, researchers who want to apply their connect "seek-
major "seekers" ers" & "solvers"
knowledge outside their own organizations
also incur search costs when seeking attractive "solvers"
innocentive access to (scientists)
opportunities. That is where a company called platform with scientifi c
base of "solvers" challenges with innocentive.com
InnoCentive saw opportunity. & "seekers" cash rewards
InnoCentive provides connections between
organizations with research problems to solve
and researchers from around the world who are free access to challenges
platform management
eager to solve challenging problems. Origi- fee to list challenges to
acquisition of "solvers" & "seekers" solve commissions on awards
nally part of drug maker Eli Lilly, InnoCentive
now functions as an independent intermediary
listing non-profits, government agencies, and in aggregating and connecting “seekers” and
commercial organizations such as Procter & “solvers.” You may recognize these qualities
Gamble, Solvay, and the Rockefeller Founda- as characteristic of the multi-sided platform
tion. Companies who post their innovation business model pattern (see p. 76). Companies
challenges on InnoCentive’s Web site are called with open business model patterns often build
“seekers.” They reward successful problem- on such platforms to reduce search costs.
solvers with cash prizes that can range from
$5,000 to $1,000,000. Scientists who attempt
to find solutions to listed problems are called
“solvers.” InnoCentive’s Value Proposition lies
 OPEN BUSINESS MODELS
“Open Innovation is fundamen- “Nestlé clearly recognizes
tally about operating in a world that to achieve its growth
of abundant knowledge, where objective it must extend
not all the smart people work its internal capabilities 115

to establish a large number

PATTERNS
them, connect to them, and of strategic partnering
build upon what they can do.” relationships. It has embraced
—— Henry Chesbrough open innovation and works
Executive Director, Center for Open Innovation
Haas School of Business, UC Berkeley aggressively with strate-
gic partners to co-create
“Long known for a preference
to do everything in-house, we product opportunities.”
began to seek out innovation —— Helmut Traitler
Head of Innovation Partnerships, Nestlé
from any and all sources,
inside, outside the company.”
—— A.G. Lafley
Chairman & CEO, P&G
OPEN BUSINESS MODELS

Outside-In
Pattern
116
PATTERNS

external organizations,
sometimes from completely
diΩerent industries, may
Building on external knowl-
be able to oΩer valuable
edge requires dedicated
insights, knowledge,
activities that connect
patents, or ready-made
external entities with inter-
products to internal R&D
nal business processes and
groups.
R&D groups.

Taking advantage of outside

innovation requires specific
resources to build gateways
to external networks.

It costs money to acquire

Established companies with
innovation from outside
strong brands, strong Distribution
sources. But by building on
Channels, and strong Customer
externally-created knowl-
Relationships are well suited to
edge and advanced research
an outside-in open business model.
programs, a company can
They can leverage existing Customer
shorten time-to-market and
Relationships by building on
increase its internal R&D
outside sources of innovation.
productivity.
 OPEN BUSINESS MODELS
Inside-Out
Some R&D outputs that are
unusable internally—for
strategic or operational
reasons—may be of high
value to organizations in

Pattern
other industries.
Organizations with 117
substantial internal R&D
operations typically possess

PATTERNS
much unutilized knowledge,
technology, and intellectual
property. Due to sharp focus
on core businesses, some
of these otherwise valuable
intellectual assets sit idle.
Such businesses are good
candidates for an "inside-
out" open business model.

By enabling others to exploit

unused internal ideas,
a company adds “easy”
additional revenue streams.