The Advance of Open Innovation

“Open innovation” inventor Henry Chesbrough explains why firms need to experiment with new business models within and across company boundaries.

If you are a bird that can’t fly, a mammal that can’t climb, or an insect that can’t hide, what could be more terrifying than living on an island that has just been compromised by an invasive species – say a python, a bird of prey, or a ferocious rodent?

The corporate world is experiencing an invasion of its own kind. Companies that think they operate safely on their own islands are more vulnerable than ever, partly because unstoppable digitalization. The invaders, the ones embracing digitalization, are innovating faster and are significantly more agile than their mature peers.

Open innovation inventor Henry Chesbrough explains why firms need to experiment with new business models

So even the alpha males of industry have little choice but to stay nimble on their toes and adapt. It’s either innovate their business models or abdicate their position in the hierarchy.

But what’s the best way to innovate?

Open innovation, or looking outside your company to create new business models is not new, but it’s gaining greater acceptance and importance in a digitally invasive corporate world. Open innovation is a term promoted by Henry Chesbrough, from the University of California, Berkeley, referring to the unhindered flow of knowledge inside and outside organizations to improve innovation potential.

As faculty director for the Garwood Center of Corporate Innovation, Chesbrough has dedicated his career to studying how companies innovate and how they can improve on their ability to adapt their business models to new circumstances. He’s of the opinion that companies should stop hiding on their islands and dedicate more time and resources to co-developing and managing business models with other organizations. SAP caught up recently with Dr. Chesbrough to ask him about how open innovation is being practiced today.

Q. What exactly is open innovation and how can companies achieve it?

A. The insight that company’s need to make more effective use of external ideas and technologies in their innovation activities is becoming more widely accepted. But what is more subtle is that companies get much more sustainable value if they also focus on innovating the business models of their external collaborators. The collaboration is not simply about sharing knowledge about technologies, but also about sharing market, customer and business model-related information. In a third step, companies should manage business models across company boundaries. This is of course a big challenge, because the business models of a company touch so many different parts of an organization and in many companies it is not clear who is responsible for innovating the business model of an organization. In most companies, open innovation and business model innovation are treated very separately. But leading companies are finding that they have to be addressed jointly. This is where I see SAP breaking new ground and leading the way, because at SAP there is a team responsible for managing that topic and relationships around it, and there is a direct connection between business model innovation and open innovation.

Can you give us a recent positive and a negative example of transformation of an established company?

From my own research, Xerox did a fabulous job in the 1980’s of developing new technologies for its copier and printer business. Semiconductor diode lasers allowed them to produce in higher quality, at a faster speed, and lower cost than competitors, and Xerox made more than $2 billion off it. But at the same time they developed a variety of technologies from Ethernet to Adobe Postscript that didn’t jive with the Xerox business model.  They were eventually spun off into extremely successful businesses such as 3com, Adobe, and Documentum that never contributed to the Xerox bottom line, but altogether achieved a market value double that of Xerox.

This illustrates both sides of the business model issue. When the technology fit the business model, Xerox made very effective use of it. But when it didn’t fit, Xerox wasn’t sure what to do with them. Project leaders took the ideas outside, raised independent venture capital, and founded new businesses.

So how should companies at the pinnacle of their industries avoid the same pitfall as Xerox – maintain a successful business model and adapt to other models?

The Xerox example exemplifies the double-edged sword of a very successful business model. If you don’t have the capacity to experiment and innovate with the business model, what will happen is that the gravitational force will draw in the things that fit with the model, but it will reject the things that don’t fit. Unless you have the capacity to innovate alternative business models, someone else will likely get a crack at it first.

My thinking has on business model innovation has transformed recently. I used to advise companies to create corporate venture capital programs or collaborate with venture capitalists and then acquire promising startups. But over the past six years we’ve had a sea change around the idea of lean startups to experiment with new business models. I believe large companies should develop and adopt lean startup methodologies to do rapid prototyping with potential customers at very early stages of development before a lot of investment has gone in to searching for a viable business model.

Can you give an example of the lean startup methodology put into action?

Amazon Web Services (AWS) began with Amazon taking its internal IT infrastructure and offering it as services to external parties. It started as a collection of shared services, for computing, storage, and networking services, because these resources were underutilized by Amazon’s primary business of Internet shopping. This is the second part of the open innovation model: Looking at existing resources or assets and finding ways to monetize them in a different way. It started out small and very experimental, but today it is a growth engine and one of Amazon’s highest margin businesses. And it’s a wonderful example of inside-out thinking about open innovation.

SAP Receives Business Model Transformation Award

At the World Open Innovation Conference 2016 in Barcelona, SAP received the Business Model Transformation Award for its ability to disrupt itself and restructure its own business model. Attendees addressed the problems and challenges companies are facing with innovation and exchange theory with practice.

At right, SAP’s Claus von Riegen (middle) receives award from Chesbrough (left) and Solomon Darwin (right) from the Garwood Center for Corporate Innovation.

Which mindset do employees need to demonstrate to be able to constantly innovate, and what can companies do to instill that mindset?

A curious mindset paired to a growth-oriented mindset provides a great combination for innovation. A curious mind would ask how digitalization can change the life of my customers, and what can we do to align ourselves more with how our customers’ lives are changing. Curiosity takes you outside the planning and organizational charts of your company and focuses you on your customers. A growth-oriented mindset says there are a lot of opportunities out there and many needs that aren’t being met. If we can find them and address them then we can grow much faster in the future.

What is the future of open innovation?   

I believe China is going to become an increasingly important player in the world of open innovation, in fact it is fair to say there is open innovation with “Chinese characteristics.” There is a lot of collaboration and competition, a lot of interaction with state-owned enterprises and government ministries but also a great deal of entrepreneurship and risk taking, all at great speed.

In order to sustain and scale open innovation, we are also going to see business model innovation become more and more a part of open innovation.

Finally, we are going to see open innovation playing out across ecosystems with many participants rather than the classical two-party model. This will increase the complexities, but also the opportunities that open innovation brings.

Business Model Innovation at SAP

The Business Model Innovation team at SAP, headed by Claus von Riegen, is a cross-Board initiative with the sole mission to pursue the right business models faster. The team provides in-house entrepreneurs (“intrapreneurs”) an environment that allows the fast and inexpensive incubation and market validation of new business models. Successful incubations are then supported in the scaling phase to drive their commercialization and to create the relevant structures, processes and incentive schemes needed for implementation.