Book Review
Open Innovation: The new imperative for creating and profiting from technology
Henry William Chesbrough
ISBN: 978-1-422102-83-1; 2005; 227 pages; Harvard Business School Press;
Stefano Mazzocchi
Research Scientist, Digital Libraries Research Group, Massachusetts Institute of Technology, Cambridge MA, United States of America
Companies that don't innovate die, but meta-innovation (innovating how to innovate) is becoming increasingly the center of the attention. In his book, Chesbrough describes two different paradigms for technological innovation: one internal (described as 'classic' or 'closed') and one external. Chesbrough's thesis is that the internal paradigm is now being rendered obsolete by the external one.
The internal paradigm is based on research and development done in-house: companies fund their research labs, which produce intellectual property, which is developed and capitalized by the company and can inject further funding in the research process. Chesbrough indicates two major factors eroding this paradigm: the growing mobility of skilled people; and the growing presence of Venture Capital. The combination of these two factors increases the permeability of the firm, and allows ideas and intellectual property to escape the company's boundaries. Chesbrough outlines how these erosions factors impacted Xerox in its PARC Research Center. He shows how the company failed to capitalize on several of the groundbreaking innovations that originated in those labs and were made profitable elsewhere.
The external innovation paradigm (that Chesbrough names 'open' in contrast with the 'closed' one) is designed to accept and profit from those eroding factors and is based on the idea that companies should develop a knowledge-creation and intellectual property management strategy which assumes that R&D involves an effective synthesis of internal research and development and intellectual property derived from the environment.
Chesbrough suggests that if firms are working in a fertile innovation environment, innovation will flourish, and that it is much cheaper and safer for firms to simply shop for the ideas that they consider most promising, which supplement their internal development efforts. The purchasing company must continue the development in-house, refine and eventually integrate the new product with existing products or services. He shows how Intel and Cisco managed innovation at the pace required by the market by investing as venture capitalists in the open market and further refining the technologies that those start-ups were able to incubate, or simply by licensing intellectual property that originated elsewhere.
The increased effectiveness of the external innovation paradigm is not only due to the cited erosion factors, but Chesbrough describes how research and development follow different rules and while the first resembles the game of poker (high risk, fast pace, low strategy), the second resembles the game of chess (lower risk, slower pace, higher strategy). He argues that while firms normally focus on the second part, it is very hard for them to play such a different and risky game. The ability to know when to stop the funding and fold or continue the capital injection is something that Venture Capital firms have learned to master, while regular firms struggle with it.
Chesbrough suggests that firms should focus on their strategic game of intellectual property acquisition to reduce their capital risks and research costs while venture capital firms (or external smaller firms) play the risky game of research.
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