Matching your business model to your open innovation strategy

12 September 2014 15:38

(updated: 18 December 2016 15:41)

Matching your business model to your open innovation strategy

Surveying 125 executives, a recent report by the Fraunhofer Gesellschaft (2013) shows the rising importance of open innovation practices for the largest companies in Europe and the United States.

Open innovation on the rise

In fact, 82% of the surveyed companies indicated to practice open innovation more rigorously in their organizations as compared to three years ago, with no company expressing the wish to abandon their open innovation activities.1 However, not all companies benefit equally from their open innovation strategy.2 To date, little research exists on why this is the case.

In our article, we argue that the match between open innovation strategy and business model design is a critical success factor in companies’ ability to benefit from their open innovation practices. The reasoning is simple and yet compelling:  Open innovation itself does not create value for the company. It is by the design of the “right” business model that the company can appropriate the sourced knowledge, create value for its customers and capture (part of this value) in conjunction with its external knowledge partners.

The tricky part is to, first, find the right open innovation strategy that fits the company’s innovation needs and, second, to design the business model accordingly.

In search for the right open innovation strategy

Notably, open innovation is a relatively broad term, encompassing everything from acquiring innovative start-ups, crowd-sourcing to R&D alliances and innovation networks. To choose the “right” open innovation strategy, executives must decide:

  1. whether the company can readily acquire the technology/ knowledge or whether it needs to co-develop it with external partner(s), and
  2. whether the company can rely on a single source of external knowledge or needs to rely, as Surowiecki puts, it on the “wisdom of the crowds”3.

These choices translate into the following matrix: 

 

When in need for readily-available technology, a company can turn to a market-based innovation strategy, that is, acquiring external knowledge by means of inward-licensing of IP, R&D outsourcing or acquisition of innovative small start-ups (think of Microsoft’s acquisition of Skype). This strategy significantly reduces development time, leading to greater efficiency.

Companies such as Made.com rely on crowd-based innovation, where communities of users vote for the preferred design which is then made available for order. This strategy is best selected when intending to offer value propositions tailored to the need of users that helped shape the innovation.

In collaborative innovation, companies partner up withlead-users or other organizations to co-develop a technology. This strategy is often adopted with the purpose of generating disruptive innovation and can hence lead to new value propositions or the creation of new markets.

Finally, a network-based innovation strategy combines the benefits of interacting with a large pool of knowledge holders and integrating these into the company’s innovation processes. The company can turn its business model into an open innovation platform (e.g., Apple’s iPhone application store which offers third-party developers a virtual marketplace for end-users).

In search for the right business model 

To create and capture value by means of these open innovation strategy, executives must carefully match their business model to their chosen strategy. To this end, in our article we propose a contingency framework of open business models and discuss the implications of open innovation strategies on the different dimensions of companies’ business models (i.e., content, structure and governance of transactions). This results in four different types of open innovation business models that companies can choose from.

 

Please find the full text available at SSRN here.

References

1Chesbrough, H., & Brunswicker, S. (2013). Managing Open Innovation in Large Firms. Study published by Fraunhofer Society and UC Berkeley. Accessed Sept 2014

2Saebi, T., & Foss, N.J. (2014) Business Models for Open Innovation: Matching Heterogenous Open Innovation Strategies with Business Model Dimensions.

3Surowiecki, J. (2005). The Wisdom of Crowds: Why the many are smarter than the few and how collective wisdom shape business, economies, societies and nations. London: Abacus.