2202 Business Model Innovation H Chesbrough

Business Model Innovation: The Next Frontier in InnovationPresentation on the Occasion of the Launch of “Open Business Models” Firenze, Italia Henry Chesbrough Haas School of Business UC Berkeley © 2008 Henry Chesbrough 1 The Current Paradigm: A Closed Innovation System Science & Technology Base The Market Research Investigations Development New Products & Services 2 R © 2008 Henry Chesbrough D&E Great Successes from the Closed Innovation Model • • • • • • The Venetian Glass Industry The Roman Catholic Church The Chemicals Industry – Germany and later US Edison, GE, and the rise of electrification Vannevar Bush – Science: The Endless Frontier Chandler: Internal R&D key to the rise of the modern US corporation in 20th century © 2008 Henry Chesbrough 3 © 2008 Henry Chesbrough 4 . but are a cost of doing business. The best people in this field work for us. I will own it. The important technologies I will need can be anticipated in advance. If I discover it first. “Misfits” are regrettable.Hidden Assumptions in the InternallyFocused Innovation System If I discover it. I will find a market for it. The Open Innovation Paradigm Licensing Other Firm’s Market Internal Technology Base External Technology Base Technology Spin-offs New Market Current Market Technology Insourcing © 2008 Henry Chesbrough R D 5 . Closed innovation Open Other firm´s market Licence. spin out. 10th Annual Innovation Convergence. 2005-10-20 Our current market . divest Internal technology base Our new market Internal/external venture handling External technology insourcing External technology base Stolen with pride from Prof Henry Chesbrough UC Berkeley. Open Innovation: Renewing Growth from Industrial R&D. 2004 6 C 2002 Henry Chesbrough EIRMA SIG III. Minneapolis Sept 27. • Financial managers must play poker. to capture the value in false negatives. © 2008 Henry Chesbrough 7 . • We must manage IP in order to manage research: – need to access external IP to fuel our business model – need to profit from our own IP in others’ business model • Not all of the smart people in the world work for us. No one has a monopoly on useful knowledge anymore. as well as chess.The Logic of “Open Innovation” • Good ideas are widely distributed today. What is Innovation? Before • Invention • Product • Technology-driven • Internally generated • Engineering’s job © 2008 Henry Chesbrough 8 . What is Innovation? After • Commercialization • Business. including process and biz model • Technology-driven • Business/value-driven • Internally generated • Internal Integration of int. stuff • Engineering’s job • Everyone’s job Before • Invention • Product © 2008 Henry Chesbrough 9 . and ext. What is a Business Model? • Creates Value • Captures a portion of that value © 2008 Henry Chesbrough 10 . What is an Open Business Model? • Uses both internal and external sources to create value • Uses both internal and external sources to capture a piece of that value © 2008 Henry Chesbrough 11 . • A Better Business Model © 2008 Henry Chesbrough 12 .Which Would You Rather Have? • A Better Technology Or. Graphic Illustration of a Generic Airline Business Model Passengers Revenue Air Travel Costs Food Airport Aircraft. Fuel Cleaning Runway Checkin Jetway © 2008 Henry Chesbrough 13 . • Guarantees airport certain # passengers in their terminal • Airport pays Ryan Air to operate out of its airport • Airport provides Ryan Air a percentage of the revenues from shops. • Only flies into regional airports. restaurants.Ryan Air • Ryan Air is a regional low-fare airline operating in the United Kingdom and northern Europe. © 2008 Henry Chesbrough 14 . car hire and hotels at airport. no landing fees. The Ryan Air Business Model Passengers Revenue Air Travel Airport Food Aircraft. Fuel Car Hire Shopping & Food Hotels Parking Jetway X Checkin X Cleaning X © 2008 Henry Chesbrough 15 . IBM: Its Closed Value Chain All IBM – pre 1993 Solutions Value-Added Activities Applications Productivity SW Operating Systems Computers Chips. devices Atoms Materials Value Chain © 2008 Henry Chesbrough 16 . IBM’s Open Business Model Solutions Value-Added Activities Integration Applications Productivity SW Operating Systems Computers Chips. devices Materials Atoms IBM Chain © 2008 Henry Chesbrough OEM Market 17 . devices Materials Other Integrators Applications Productivity SW Operating Systems Computers Chips. patents • IBM captures value through value-added services and software “up the stack” © 2008 Henry Chesbrough 18 .IBM’s Open Source Business Model • Spends about $100M each year on Linux – 50% for general improvement – 50% for specific improvements for IBM gear • Others spend another $800M a year • IBM creates value through Linux – Also donates development tools. The Business Model • Identifies a market segment • Articulates the value of the proposed offering • Focuses on the key attributes of the offering • Defines the value chain to deliver that offering • Creates a way for getting paid • Establishes the value network needed to sustain the model © 2007 Henry Chesbrough 19 . Business Model Maturity Stages 6 stages 1. Differentiated business model 3. Segmented business model 4. Platform leadership business model © 2007 Henry Chesbrough 20 . Integrated business model 6. Undifferentiated business model 2. Externally aware business model 5. luck Can’t attract capital.Stage 1-Undifferentiated • • • • Commodity No differentiation Hard work. can’t scale • Example: most restaurants © 2007 Henry Chesbrough 21 . hustle. Stage 2-Differentiated • • • • Performance advantage Ad hoc processes Hard to sustain “one hit wonders” • Example: most technology startups © 2007 Henry Chesbrough 22 . Segmented • • • • Can serve multiple segments More profit. more volume (low cost) More sustainable Still too internally focused • Example: many industrial firms. Xerox © 2007 Henry Chesbrough 23 .Stage 3 . Big Pharma © 2007 Henry Chesbrough 24 .Stage 4 – Externally Aware • Now harnesses external sources of technology to complement internal • More “at bats” with same dollars • Share risks as well as rewards • Broader market now available to serve • Example: SAP R/3. Nike.Stage 5 .Integrated • External sources routinely utilized to fuel your business model • Unused internal ideas allowed to flow outside to others’ business models • Company becomes a systems integrator of internal and external technologies • Examples: Millennium. Procter & Gamble © 2007 Henry Chesbrough 25 . other biotechs. an ideal • Company now benefits from investment of others in the platform. . customers.Stage 6 . Dell. WebSphere.NET. WalMart © 2007 Henry Chesbrough 26 . – Suppliers. third parties • Ecosystem created – Company must balance value creation with value capture – Cannot become predatory.Platform • Ultimate stage. Company can induce investment. destroys ecosystem • Examples: iPod. Who Owns Business Model Innovation? Marketing? Research and Development? Operations? Corporate Strategy Office? Business Development? Finance? Business Unit GM ? CEO/COO ? | 27 | . Why Business Models are Hard to Innovate: Mapping Across Domains Technical Inputs: e. profit Measured in technical domain © 2007 Henry Chesbrough Measured in social domain 28 . • key attributes • value chain • how paid •Value network Economic Outputs: e.g.g. feasibility.. price. performance Business Model • target market • value prop. value.. Type I and Type II: Xerox and PARC © 2007 Henry Chesbrough Designed to minimize “false positive” errors Ignores risk of “false negative” errors 29 . DEC.3Com • Metcalfe left PARC in Jan. Exxon • Brokered alliance between Xerox. and Intel for IEEE 802 (aka Ethernet) • Initial plan: sell to Unix workstations. of 1981 – DEC. GE. 1979 • Did consulting work until Feb. via direct sales force © 2007 Henry Chesbrough 30 . Then…. created directory of LAN dealers and VARs across US – first of its kind – sold many hundreds of copies at $125 each – did this for 5 years • IBM PC took the world by storm • 3Com formed. • As part of consulting. sold through IBM retailers and VARs © 2007 Henry Chesbrough 31 . Krause joined from HP – VCs financed: • New plan: add-on boards for IBM PCs. complete with own hardware.Adobe • Warnock and Geschke at PARC – creating fonts for Star Workstation – wanted to make into a standard – Xerox said no: “how can we make money if we give it away?” • They leave. and form Adobe • Initial plan: turnkey publishing system. and fonts © 2007 Henry Chesbrough 32 . software. “don’t do the whole system” Steve said. etc.” . software.Charles Geschke Today. Adobe’s market value exceeds that of Xerox © 2007 Henry Chesbrough 33 . It wasn’t there in the beginning. “Steve Jobs and Gordon Bell were key ingredients in getting things going… Gordon said. That’s how the business plan formed.“We were originally going to supply a turnkey systems solution including hardware. “just sell us the software”. printers. Different Financial Processes Chess: Type I errors • Plan several moves ahead • No new information needed • You know what you’ve got. what opponent has • NPV © 2007 Henry Chesbrough Poker: Type II errors • Pay to play • Pay for new information • You discover what you’ve got. what other players have • Options 34 . Lousy at Poker 40000 35000 30000 US Dollars (millions) 25000 Xerox Adobe Documentum Komag SynOptics VLSI 3Com Doc Sci FileNet Objectshare SDLI Sum (10) 20000 15000 10000 5000 0 19 78 19 80 19 86 19 82 19 88 19 84 19 90 19 92 19 94 19 96 19 98 20 00 © 2007 Henry Chesbrough Year 35 .Xerox: Great at Chess. The Economic Pressures on Innovation Revenues 0 Costs Internal. Costs © 2007 Henry Chesbrough Own Market Revenue Closed Model Before 36 . Development. Costs Rising costs of innovation Closed Model Before © 2007 Henry Chesbrough Closed Model After 37 .The Economic Pressures on Innovation Shorter Product Life in the Market Revenues Own Market Revenue Own Market Revenue Internal Development Costs 0 Costs Internal. Development. Costs Own Market Revenue Internal and External Dev. Costs Cost Cost and Time savings from leveraging External development Closed Model Open Innovation Business Model 38 © 2008 Henry Chesbrough . Development.The New Business Model of Open Innovation New Revenues New Mkts Spin-off Revenue Licensing Own Market Revenue Internal. 39 .