Revolutionary intellectual property management

Citation

Leavy, B. (2007), "Revolutionary intellectual property management", Strategy & Leadership, Vol. 35 No. 5. https://doi.org/10.1108/sl.2007.26135eae.001

Revolutionary intellectual property management

Revolutionary intellectual property management

Open Business Models: How to Thrive in the New Innovation Landscape

Henry ChesbroughHarvard Business School Press, 2006

Companies that don’t innovate die. This is not news. In the current environment, however, to innovate effectively, you increasingly must innovate openly. And to innovate openly, you must do more than search externally for new ideas or license out more of your own ideas. You must also innovate your business model.

Business model innovation is one of the most daunting challenges corporate leadership can face. Henry Chesbrough’s Open Business Models aims to show how to do it by employing a radical method of managing a firm’s intellectual assets. While Chesbrough “does not assume familiarity” with his earlier best-seller, Open Innovation: The New Imperative for Creating and Profiting from Technology (2003), his newest offering, with its distinct shift in emphasis onto the challenge of how to open up the business model, and become more astute in the management of intellectual property (IP), largely picks up where the previous book left off. The author’s overall aim is to inform those new to the notion of open innovation “about its power and value,” while offering those already quite familiar with it with guidance on “on how to take the next steps to make it pay off.” His approach has gained him some distinguished admirers. Scientific American recently named Chesbrough, an adjunct professor at the Haas School of Business at the University of California, Berkeley, and Executive Director of the Center for Open Innovation at the school, to its list of Top 50 Business and Technology leaders.

In his earlier book, he drew attention to the fundamental shift, already much in evidence by the early 2000s, from a long-standing paradigm of closed innovation to one that is daringly open. In the “closed innovation” era, companies in technology-driven industries such as pharmaceuticals and information technology aimed to create and capture value based primarily on their own IP. In Open Innovation, Chesbrough pointed to several recent trends that have been reducing the advantages both of this closed innovation model, and the economies of scale in R&D. The most notable of these trends have been the increasing availability of venture capital and of external options for bringing unused ideas to market, the advancing innovative capabilities of both suppliers and customers, and the increasingly availability and mobility of skilled workers. Developments like these are fuelling the movement towards more open innovation, already exemplified by companies such as IBM and P&G.

Open Business Models is an attempt to help other companies to follow such examples by raising more awareness of the opportunities that open innovation facilitates and offering advice on how to meet the challenges involved in adopting this new approach. The book is organized into two main parts. The first half of the book focuses on the major rationale, principles, concepts and concerns that underpin the open innovation perspective and the second half deals with the practicalities of “how to implement more open business models.”

The author begins by revisiting the rationale for open innovation in the business world today and then showing why it makes more sense that ever. He points out that well into the early 2000s, fully 90 percent of the patents generated in many research-intensive industries were still being left to languish, reflecting a massive underutilization of research output. At the same time, the rising costs of technological development in many of these industries, coupled with ever shortening product life cycles, are leading to a worrying decline in research productivity. Considerations such as these add impetus to the search for more effective ways to manage innovation. In response, best practice companies have been experimenting with a new “division of labor” in which ideas now “travel from invention to market” through two or more companies.

Such a trend raises the question that if the ideas concerned are so valuable in the first place, why don’t the originators themselves bring them to market? The answer “goes to the very heart of what is important about intermediate markets for innovation.” Because of their history of successes, different companies possess “different assets, resources, and positions” and come to “look at opportunities differently.” Intermediate markets can help ideas to “flow out of places where they do not fit and find homes in companies where they fit better.” As the well-known case of Xerox PARC has been often used to illustrate, exciting technology is never enough on its own. The right business model is also essential in order to fully realize its potential value.

Secondary markets for innovation

However, the path to open innovation is “not a simple, straight one.” Many companies are likely to face resistance from deeply ingrained not-invented-here mindsets. They may also face concerns that opening up the innovation process may hollow out internal R&D capability if they allow themselves to become too dependent on externally sourced IP. Another apprehension is that they might end up competing with their own technologies in the marketplace if they license out their own IP. Yet, where IP is simply inventoried or left unused, not only does a company lose the opportunity to generate additional revenue that might help in funding future R&D, but researchers are denied the opportunity to learn directly from the experience of users and reapply this learning to the next generation of IP.

While the ability of firms to open up their business models is one of the main factors determining the capacity to thrive in an “open innovation world,” another equally important development is the emergence of secondary markets for innovation that help make trading in IP more efficient. The last 20 years have seen the growth of such markets across a wide range of categories from semiconductors and pharmaceuticals to financial services and entertainment. Here again, though, progress has not been easy and substantial impediments remain to be overcome. One the most critical is “the simple lack of information about the extent and terms of trade in secondary markets,” making it difficult for firms to know what attractive technologies might be available. Another is the difficulty of knowing how to place a value on the fruits of IP, once secondary markets have been found.

The author then goes on to point out that firms ready to embrace the principles and perspective of open innovation will have to learn how to approach the management of IP with a new level of sophistication. Traditionally, IP management has been equated with the filing of patents and the resolution of infringements, with much of the organizational responsibility devolved on the legal function, and policing and protecting it as the primary concern. In an open innovation environment, IP needs to be managed in a more strategic way.

Two considerations are important here. Firstly, managers need to become more aware that technology-as-practiced and patent coverage are rarely completely aligned, so that a company’s patents may protect only part of its technology, while the remainder of its technology may overlap with the patent coverage of other companies. The difficulties arising from such lack of alignment tend to become more acute in an environment where IP is more actively traded, and they require more skill in patent mapping, which itself is far from an exact science. More important still is the ability to adapt the management of IP to the different phases of the technology life cycle. To illustrate this point, the author uses the example of Microsoft, which he suggests should currently be less concerned about the potential piracy of its Windows platform in the emerging Chinese market where winning the race for desktop dominance is still the main priority. Instead, anti-piracy should be a priority in its more established markets, where protecting current revenues is the more pressing strategic consideration. As the author argues, “IP management must be driven first and foremost by the business objectives of the company, and not by a legal perspective.”

Having identified the opportunities and challenges that this new environment for innovation presents, the author then turns to how they might be addressed.

A business model framework

A first step is to assess how far your business model is advanced to take advantage of the opportunities on offer. To help with this, Chesbrough develops a diagnostic tool he calls a business model framework. The framework identifies six types of business models, presented in order of advancing sophistication as measured by open innovation and the management of IP. These models range from the most basic type, Type 1, characterized by little or no differentiation, with little emphasis on innovation and no IP to manage, all the way up to Type 6, in which IP is integral to the business model and truly managed as a strategic asset.

To readers of S&L the categories likely to be of most interest are types 4, 5 and 6. Type 4 signals the “beginning type of more open business models to come,” where the company is starting to look externally for ideas and inputs into its innovation process and shares its internal technology road map with suppliers and customers on a frequent basis. IP starts to be viewed as an enabling asset, opening up access to adjacent markets. In Type 5, the company progresses to the stage where its innovation activities become even more integrated into its business model. Innovation becomes recognized as a business function in its own right reporting directly into senior management, and suppliers and customers become more fully absorbed into the company’s innovation process. IP management takes on a more strategic character, with patent mapping actively focused on revenue generation as well as risk reduction, and IP treated as a financial asset. Companies with Type 5 business models typically try to position themselves as innovation partners-of-choice as they seek to expand their innovation ecosystems. In Type 6, the company develops its business model into an innovation platform, driving the business models of suppliers and customers, who share in both technical and financial risks and also in the rewards of the innovation process. The company develops the ability to innovate its business model through strategic experimentation and IP is viewed as a strategic asset. The management of innovation and IP becomes fully embedded in every business unit of the company, and part of the corporate DNA.

Using the business model framework on offer here, companies can assess how far along the road to open innovation they have already traveled and define what more they need to do to advance to the highest levels. (See the author’s Table 5.2 (Exhibit 1)) This is not a road they have to travel on their own. New types of market intermediaries are emerging in response to the basic challenge of how to bring potential IP buyers and sellers together in more efficient and less risky ways. And in terms of managing the process of transition to more open business models, companies can learn some valuable lessons from the experiences of the pioneers.

Exhibit 1 Diagnostic questions for assessing your business model within the dynamic business model framework

The new innovation intermediaries

Lastly, Chesbrough highlights the emergence of the new innovation intermediaries, and examines the various ways in which they can be helpful to companies seeking to become more actively involved in the buying and selling of IP. He does this by focusing in some detail on the business models of six such companies. Of his examples, InnoCentive and NineSigma function primarily as agents on behalf of buyers; Big Idea Group operates as potential co-developers; and InnovationXchange and Shanghai Silicon IP Exchange serve as brokers. His final example, Ocean Tomo, is pioneering the creation of a financial market for IP as an asset class in its own right, where investors might soon be able to take positions in a company’s IP rather than its overall stock. The author then goes on to highlight how the changing innovation landscape is also is giving rise to the emergence of new “pure play” IP companies, such as Qualcomm, UTEK Corporation and Intellectual Ventures, and examines the variety of economic roles they seek to play in the new environment. He also alerts us to the arrival of a new type of predator, the so-called “patent troll”, specializing in aggregation of undervalued IP and using it to extract some easy money out of unwary companies that stumble into legal infringement.

The author ends by offering some process guidelines as to how to manage the transition to more open business models. These are gleaned from an extended look at the experience of IBM, P&G and Air Products. Each once functioned with quite closed innovation models, but all have since succeeded in opening their business models significantly. Each has also encountered significant challenges along the way. While the stories of IBM and P&G are quite familiar, that of Air Products was chosen to complement them because industrial chemicals seems “far distant from the cutting edge of innovation,” so that if open innovation is already making an impact here, it looks set to make one almost anywhere. In all three cases the transition process was seen to follow four similar phases, phase one involved a shock to the system, phase two then set in motion a process of experimentation in the search for new revenue sources, phase three began to identify the contours of the newly emerging business model, and phase four then focused on the challenge of scaling this new model up.

Readers well versed in the literature on strategic change are likely to recognize in this phased model of transition a fairly familiar pattern. Yet, the knowledge of how the process of business model innovation played out in all three cases will still be of practical value to many. More valuable still will be the insight generated by Open Business Models into the emerging face of the new innovation landscape and the kind of business ecosystems that are most likely to evolve within it. This, along with the diagnostic tool designed to help a company open out its business model, and the advice on how to manage IP more astutely and strategically, all make Henry Chesbrough’s latest offering a further worthwhile addition to any strategist’s bookshelf.

Brian LeavyAIB Professor of Strategic Management at Dublin City University Business School (brian.leavy@dcu.ie) and a Strategy & Leadership contributing editor.