Thursday, June 18, 2009

What is an Open Business Model?

The term Open Business Model was coined by Professor Henry Chesbrough, author of Open Business Models: How to Thrive in the New Innovation Landscape.Chesbrough, who coined the term Open Innovation a couple of years earlier, almost rewrote the same book replacing "Innovation" with "Business Models" thus roughly defining Open Business Models as Business Models using external sources for innovation or external vehicles for commercialization of non-core innovations.

What does Open mean? In relation to what?
What makes the concept of Open Business Models tricky is not only that the term Business Model is ill defined, but the term Open has gained many different meanings in relation to businesses and their business models. Concepts such as Open Source, Open Data, Open Cloud, Open Standards, Open Business, Open in relation to democratization, Open in relation to public accessibility, Open in relation to the lack of lock-ins, Open in relation to transparency in businesses and government, and so on.

I see most of the concepts above as different value propositions towards users, partners, developers or other value recipients such as society. In relation to business models I separate between Open (or Collaborative) Business Models and Transparent Business Models and will write a separate blog post about the latter one in the near future.

My definition of Open Business Models
I agree with Chesbrough that Open in relation to Business Models should relate to the boundaries of an organization and its transactions with external actors. However, I would not limit it to transactions of innovations from research, but include all transactions between actors in the value network. Also, I would include transactions with own customers and users (or actors at the end of Chesbrough's innovation funnel) to include customers as a source of ideas, as co-developers, testers or distributors. Transactions can be with or without restrictions, with or without the exchange of money, with outside researchers, developers, competitors, distributors, users, customers or other stakeholders.

Thus according to my definition all business models are to some extent open, and there is a scale from fully integrated companies only having transactions with its customers, to companies extensively using external assets and capabilities to create and capture value. Basically I see Open Business Models as complementing internal ownership of assets, capabilities and activities, with access to needed resources and processes from outside actors, to create or capture value.

What is then new with Open Business Models?
Businesses have for a long time used outside resources, expertise and information for research, development and commercialization. However, with increasing competition, reduction of technology and product life-cycles, increasing technology and product complexity and high level of uncertainty, increasingly companies realize the potential of outside resources for value creation and value capturing. A frequently used example is Procter & Gamble, sourcing 50% or its ideas and innovations from outside, and capturing value through own products, technology and IP licensing, joint ventures with competitors and so on. Another interesting fact is what can be seen in the picture below: companies increasingly relying on external sources of technology.

Potential Benefits with Open Business Models
Common arguments for open or collaborative business models are:
  • Lowering cost of development or commercialization
  • Speed up development or commercialization
  • Sharing of risks with other actors
  • Learn from experts or users
  • Create stronger value propositions
  • Build a community of loyal testers and early users
  • Be associated with values such as collaborative and open
Potential Risks with Open Business Models
Although substantial benefits can be gained from harnessing Open Business Models, pitfalls exist. Some of them being:
  • Misreading the potential contribution from external actors
  • Asymmetric benefits resulting in conflicts over priorities
  • Negative leverage due to extensive compromizing
  • High transaction costs in managing the collaboration
  • Leak of valuable assets and capabilities
  • Loss of control over assets, capabilities or position in value network.
What is your Collaborative Advantage?
So why should other companies collaborate with you and not with your competitors? Why shouldn't you pay for access to certain external assets or capabilities as everyone else? Why should anyone provide you with exclusivity to technology or markets?

When realizing that value creation or capturing can be made more profitable using external actors, one quickly understands that the design of value propositions and incentives are important pieces of the puzzle. What are your value propositions towards partners? Is it access to unique assets or capabilities? Is it access to certain market segments through established relationships or brands? Strong distribution channels? Access to capital or infrastructure? etc.

Not limited to new ideas
In a business environment characterized by increasing competition, reduction of technology and product life-cycles, increasing technology and product complexity and high level of uncertainty, companies realize they must identify and decide on where the core of their competitive advantage lies, and identify external actors to complement their own assets and capabilities, to stay competitive. This is not limited to new ideas or innovations as in the concept of Open Innovation, but applicable to all parts of the business model.

I will follow up this post with tips on how to approach and apply Open Business Models.

Further Reading:

1 comment:

  1. Hi, Its a very nice posting, i like it. you have given us a very good information about business.
    It will help a lots of people & i hope that u will help in future also. Nice blog Keep it up!!!!!!!!!!!