Open Innovation and Strategy

Open Innovation and Strategy
Henry Chesbrough and Melissa Appleyard
California Management Review, Fall 2007

A new breed of innovation — open innovation — is forcing firms to take a different view of business strategy.

Traditional business strategy has focused on building barriers to competi­tion, rather than promoting openness.  Recently, however, firms are experimenting with new business models based on harnessing collective creativity through open innovation.

If we are to make strategic sense of innovation communities, ecosystems, networks, and their implications for competitive advantage, we need a new approach to strategy — an “open strategy.”

In “Open Innovation and Strategy,” the authors explain how companies can revise their business strategies to take advantage of the benefits of openness.

Henry Chesbrough is the executive director of the Center for Open Innovation at the Haas School of Business at the University of California at Berkeley.  Melissa Appleyard is a professor at the School of Business Administration at Portland State University.

As they explain, the traditional views of business strategy are based upon ownership and control.  None of these views consider the importance of external resources that are not owned by the firm, but create value for the firm.  These external resources, such as volunteer contributors, innovation communities, and surrounding networks represent growing sources of value creation.

To shift the focus of strategy from ownership to openness, companies must reconsider the processes that underlie value creation and value capture.  Openness is defined as the pooling of knowledge for innovative purposes where the contributors have access to the inputs of others and cannot claim exclusive rights to the innovation.

Examples such as the social networking Web site MySpace, and open source software such as the Linux operating system, create value for everyone who uses them, and no one is excluded from using them.

The value of openness is actually enhanced with every user in two ways:

  • First, users directly contribute ideas and content to improve the quality and variety of the product.  MySpace relies on individual contributors, Wikipedia relies on individuals for both data entry and editing, and Linux relies on a global innovation community.
  • Second, the more users, the more attractive the product becomes to companies producing complementary goods or services.  This dynamic, where more users beget more users, has been labeled a “netw...