Open innovation: The new imperative for creating and profiting from technology

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Citation: Henry William Chesbrough (2003) Open innovation: The new imperative for creating and profiting from technology.
Internet Archive Scholar (fulltext): Open innovation: The new imperative for creating and profiting from technology
Tagged: Business (RSS) Innovation (RSS), Strategy (RSS), Open Innovation (RSS)

Summary (Abstract)

Open innovation is a term coined by Henry Chesbrough and made famous most effectively in this book that argues that increasing often, firms must reach beyond typical firm boundaries and internal R&D routines in order to innovate and succeed competitively. The book, published by Harvard Business School Press, is semi-academic in that it summarizes and recapitulates work published primarily in other papers but is geared toward an audience primarily of managers and practitioners.

Chesbrough defines open innovation as, "a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology" (xxiv). Basically, the argues that a series of "erosion factors" have changed firms environments so that they cannot remain competitive with centralized, internal, R&D processes.

The book pulls heavily from the experience of Xerox PARC and John Seeley Brown, a former director of PARC, who wrote the forward to the book. The first chapter is an extended example taken from PARC's history and many of the subsequent chapter build on and pull from examples from PARC.

After this introduction, the book provides a chapter characterizing what Chesbrough calls the old "closed" development model based on large R&D labs -- Bell Labs and GE Labs and even Thomas Edison's Menlo Park might be good examples. He argues that three factors have eroded this model:

  1. An increasing availability and mobility of highly educated and highly skilled workers.
  2. A venture capital market which supports the creation of well-funded start-ups (often with employees from existing firms).
  3. Additional options for using ideas created by a firm from outside that firm.
  4. External suppliers with increasing capabilities.

In his third chapter, Chesbrough argues that together, these erosion factors open the door to an "open innovation paradigm" which essentially means that companies are more willing to look outside of the firm for new innovations and more willing to let their innovations be commercialized outside the firm as well. He is not arguing for free software or open source. Indeed, he strongly emphasizes the need for new systems for managing the transfer and licensing of patents and other intellectual properties. It is the increase use of these tools, indeed, that facilitates much of what falls under the open innovation umbrella.

The fourth chapter is essentially a recapitulation of on business models found in an article published with Dick Rosenbloom (2002) on The role of the business model in capturing value from innovation published in Industrial and Corporate Change. The chapter essential argues for a more nuanced definition of business model that captures a series of functions including: (1) an articulated value proposition, (2) an identified market segment, (3), a structured value chain, (4) a specified revenue generation mechanism that estimates the cost structure and target margins, (5) a description of the value network linking suppliers and customers, and (6) a formulation of a competitive strategy. The chapter is somewhat out of sync with the core open innovation argument, although Chesbrough uses examples to show how business models kept firms from pursuing alternative models that might have been possible in an open innovation framework.

The rest of Chesbrough's book is detailed case studies from a variety of high-technology firms.

Theoretical and Practical Relevance

Chesbrough's work is influential and has been cited several thousand times in the 7 years since its publication. It is often confused with Eric von Hippel's work around Democratizing innovation although there are important differences. von Hippel's work is more on minimizing or even removing appropriability regimes as means of allowing users to innovate freely as is the case in FLOSS communities. Chesbrough offers a much more business-friendly, and less radical, option that might describe any patent licensing practices.