Open Innovation: The New Imperative for Creating And Profiting from Technology [ペーパーバック]

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.