Tuesday, January 02, 2007

Open Business Models - Henry Chesbrough

Open Business Models: How to Thrive in the New Innovation Landscape.
Henry Chesbrough. Harvard Business School Press. 2006. List $35.00. 215 pages.

Henry Chesbrough follows up his first book, Open Innovation, with a second which provides more details on how to build an open business model to take advantage of the innovation or intellectual property from other companies and to monetize unused IP within your own company.

As the author pointed out in his first book, modern products and the technologies that support them are far too complex to be completely developed by a single company. Therefore, companies must learn to cooperate with each other to leverage the expertise that each has. Chesbrough points to the importance of licensing IP as an important part of this practice. Most companies possess IP which they are not using and which they will never use. However, it is a mistake to assume that the IP is not valuable to others with different capabilities and a different market focus. Companies like Qualcomm have recognized that their real capabilities are in developing new technologies for the cellular communications market, but not in making products for sale to the consumer. Therefore, Qualcomm focuses on making chips and licensing its technologies for others to incorporate into cell phones. IBM, on the other hand, has significant manufacturing capabilities and has begun to supplement its core business by licensing its extensive portfolio of IP. That company has increased its IP licensing revenues from a few million dollars per year to $1.2 billion.

Traditionally, companies have relied on their own internal R&D for new technologies to drive future products. These companies have also worked hard to hide or protect these technologies from competitors – a closed business model. Chesbrough’s open business model calls for companies to rely upon both internal and external R&D for new technologies. This is coupled with a modified revenue model in which the company makes money from selling products, licensing IP, creating spin-offs, and selling IP outright. The success of IBM, Qualcomm, and others in creating significant business revenues from previously unused IP suggests that a number of companies, usually large companies, possess untapped riches in their patent vaults.

As companies create partnerships and practice an open business model, they must be careful to avoid giving away the farm. Chesbrough contrasts the approach of two companies in working with partners. GO approached Microsoft to convince them to develop applications for its pen operating system. However, they forgot that Microsoft’s primary business was operating systems, not applications. Therefore, following partnering discussions that exposed the details of GO’s product, Microsoft used this information to create the PenWindows operating system and pressured GO out of business. Collabra, on the other hand successfully developed a product and released it before competitors like Microsoft could respond. Their partnering discussions limited access to their IP and they worked with people far from the strategic headquarters of Microsoft.

Chesbrough’s open business model focuses on leveraging all of the IP owned by a company by licensing it, and encourages taking advantage of the IP of others. He advises for companies to change their perception and practice regarding their IP portfolio, viewing it as valuable resources for revenue generation rather than simply as a means of protecting existing products.


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