Pattern · Innovation & product
Open Models
Also known as Open business models, Open innovation, Licensing in and licensing out. Anchored to Henry Chesbrough, 2006.
Treating ideas as tradeable in both directions: buying in what you would otherwise have invented slowly, and selling out what you own and will never use, on the argument that most of what a business knows is sitting idle and most of what it needs already exists somewhere else.
Plate · The shape
How it works
Chesbrough's starting observation was about waste. Large research organisations were generating far more intellectual property than their own business models could use, and were sitting on it because it had been paid for and therefore felt valuable. Meanwhile the same organisations were spending years reinventing things that already existed outside their walls, because internal invention was the only route anyone had built.
The open model runs innovation in two directions. Outside-in means acquiring ideas, technology and capability from elsewhere: licensing, partnership, acquisition, joint development, or simply buying rather than building. Inside-out means letting your own unused assets go out into the world, through licensing, spin-outs, or deliberately giving something away to establish a standard that benefits you elsewhere.
The hard part is not the transaction. It is that both directions require a business model capable of capturing value from something you did not invent, or from something you no longer control. That is a commercial design problem rather than a research one, which is why Chesbrough's second book is about business models rather than about innovation, and why so many firms adopt the vocabulary and none of the mechanism.
The parts of the model
Outside-in
Acquiring ideas and capability from elsewhere rather than developing them internally: in-licensing, partnership, joint development, sponsored research, or straightforward purchase.
Signals
Buy-versus-build is a real decision with a process, not a default towards build · The business has in-licensed something material in the last two years · Somebody is responsible for knowing what exists outside
Inside-out
Letting internal assets go outward: licensing intellectual property to others including competitors, spinning out a technology into a separate venture, or releasing something openly to set a standard.
Signals
There is an inventory of what the business owns and does not use · Licensing income exists as a line rather than as an occasional windfall · Something has been deliberately given away for a strategic reason
The absorptive capacity
The internal capability to recognise, evaluate and actually use an external idea. Without it, outside-in is a procurement exercise that produces nothing.
Signals
The business does enough of its own work to judge somebody else's · External ideas get integrated rather than filed · Technical people are rewarded for finding a good outside solution rather than penalised for not inventing it
The capture mechanism
How the business makes money from an idea it either did not create or no longer controls exclusively: a service, a brand, a data advantage, a manufacturing position, a licence stream.
Signals
There is a clear answer to how you earn from this if a competitor uses the same idea · Openness is paired with something proprietary rather than standing alone · The business can name what it holds that the open thing does not include
How you know you are in it
You do not fill a pattern in. You recognise yourself in it, or you do not. Read these as a list about your own business rather than as a definition.
- You own intellectual property, brand assets, tooling or content that has produced no revenue in three years and that somebody else could obviously use.
- Your development pipeline is full of things being built internally that could have been licensed in for less than the cost of a single year's effort.
- A competitor is doing something you have the underlying capability for and never commercialised.
- You have said no to a partnership because it felt like giving something away, without ever calculating what the something was worth to you unused.
- Your best technical people spend a meaningful share of their time reproducing work that exists in the public domain.
- You give something away already, informally and without a reason, and nobody has asked what it is buying you.
The numbers that decide it
- The value of unused assets, honestly assessed. Not what they cost to develop, which is sunk, but what somebody would pay for them today. Development cost is the single most common anchor and it is irrelevant.
- Cost and time to acquire externally against cost and time to build internally, with the internal estimate adjusted upwards for the historic overrun rate, which every organisation has and few apply.
- Licensing income against the cost of running a licensing function: legal, technical support, contract management and enforcement. Small licensing programmes frequently cost more than they earn, which is a reason to license selectively rather than not at all.
- The cannibalisation question, calculated rather than feared: what do you lose in your own market by licensing to a competitor, against the royalty and the market expansion you gain.
- Absorptive capacity as a cost: keeping enough internal capability to evaluate external ideas is a permanent expense, and cutting it is the fastest way to make an open strategy stop working.
When this shape works
- The business owns more than it can commercialise, which is true of almost every organisation that has been developing anything for a decade.
- There is a real market of external ideas: an active supplier base, a research community, or a set of firms with complementary assets.
- The business has something proprietary that openness does not threaten, such as a brand, a customer relationship, a manufacturing position or data nobody else has.
- Speed matters more than ownership, which is increasingly the case in fast-moving categories where a two-year internal development finishes into a changed market.
And when it doesn't
- The intellectual property is the whole business and licensing it out is simply selling the company in instalments.
- There is no internal capability left to evaluate external ideas, in which case outside-in becomes buying whatever the most convincing salesperson offered.
- Contracting and enforcement costs exceed the value of the deal, which is common in small businesses and is the reason most small-firm licensing happens informally or not at all.
- The organisation's culture rewards internal invention exclusively, so external ideas are found, evaluated and quietly rejected regardless of merit.
How this pattern dies
Open as vocabulary
The firm announces an open innovation programme, runs an accelerator, hosts a challenge and issues a press release. Nothing is in-licensed and nothing is out-licensed. The mechanism was never built, because building it means changing how buy-versus-build decisions are made and how technical people are rewarded, and neither is a press release.
Hollowing out
Outside-in is pursued to reduce cost, internal capability is cut as the savings arrive, and within a few years the firm can no longer judge whether an external offer is any good. Cohen and Levinthal's point is exactly this: the ability to use somebody else's idea depends on doing enough of your own work to understand it.
Licensing to your own competitor
The royalty looks like free money and the licensee turns out to be building a position in your market with your technology. The mistake is treating a licence as a financial transaction rather than as a strategic one, and it is usually made by a finance function without a strategy conversation.
Giving away without a capture mechanism
Something is released openly in the hope that goodwill converts into business, with no proprietary complement attached. Openness with nothing behind it produces adoption and no revenue, which is a fine outcome for a charity and a poor one for a business that needed the money.
Valuing assets at what they cost
Licensing negotiations anchored to development cost rather than to the licensee's value. Deals do not happen, and the firm concludes there is no market for its intellectual property when what there is no market for is its accounting.
In the wild
Procter and Gamble's Connect and Develop
The programme Chesbrough's work is most associated with, which set an explicit target for the proportion of innovation sourced externally and rebuilt the internal processes to meet it. Notable because the target forced the mechanism rather than the other way round.
Arm Holdings
UK, Cambridge, and the strongest domestic example of inside-out at scale. Arm designs processor architectures and manufactures nothing, licensing designs to the firms that build the chips. The whole business is the licence, which is what an open model looks like when it is the strategy rather than a supplement to one.
Strategyzer's own canvas
Directly relevant here. The Business Model Canvas was released under a Creative Commons licence and became ubiquitous, and the business was built on the tooling, training and certification around it. Giving away the asset created the market for everything else, which is the inside-out logic applied to a diagram rather than a patent.
The engineering firm that licensed its jig
Owner-managed, UK, and the small-business version. A specialist manufacturer with a fixture or process it developed for its own use, licensed to firms in adjacent sectors who are not competitors. Modest royalty income, no additional capacity required, and the most common form open models take below a certain size.
The owner-managed version
Most owner-managed businesses read this pattern and conclude it is for firms with research laboratories. It is not, and the version that applies is usually sitting in a cupboard.
Every business that has been going fifteen years has built things it no longer uses. A process, a training programme, a piece of software written for one job, a jig, a set of templates, a method that works and was never commercialised. It cost money to create, it earns nothing, and it feels valuable precisely because of what it cost, which is the worst possible reason to hold on to it.
So do the inventory. Write down what the business owns, what it uses, and what it does not. Then ask, for each unused item, who else would find that useful and would they be a competitor. The answer is frequently no, because the same method is often valuable in a sector you do not serve, and licensing to a non-competitor is close to free money once the contract exists.
Going the other way is the discipline most small firms find harder, because building things yourself is enjoyable and buying them feels like an admission. I would put one question into every development decision: how much of what we are about to build already exists, and what would it cost to buy it. Not to always buy. Just to always ask, out loud, with a number attached.
One genuine warning. If your business is your intellectual property, licensing it out is selling the company slowly and calling it revenue. The test is whether you keep something the licensee cannot take: the relationship, the judgement, the brand, the ability to do the next version. If you would keep nothing, do not license it. Sell it properly, once, and negotiate hard.
Changing out of this shape
Start with the inventory in both directions, since neither can be decided in the abstract. List what the business owns and does not use, valued at what a buyer would pay rather than at what it cost, and list what is being built internally that exists outside. Then attach a capture mechanism to anything you are considering releasing: openness has to be paired with something proprietary, or it produces adoption without revenue. Protect absorptive capacity explicitly when outside-in savings arrive, because cutting the people who can evaluate external ideas is the standard way this strategy quietly stops working. And treat every out-licence as a strategy decision with a finance consequence rather than the reverse, since the deals that go wrong are almost all deals that were approved on the royalty alone.
Where to go from here
Frameworks that work inside this pattern
- Core Competence Analysis
A test of what a corporation is genuinely good at: the collective learning and coordination skills that pass three tests by opening access to a wide variety of markets, contributing significantly to perceived customer benefit, and resisting imitation.
- VRIO Framework
Four sequential tests, valuable, rare, inimitable, organised, that determine whether a resource or capability is a source of sustained competitive advantage or merely something the firm happens to own.
- Business Model Canvas
A one-page visual template that describes how an organisation creates, delivers and captures value across nine building blocks, from customer segments through to cost structure, so an entire business model can be seen, questioned and redesigned in a single view.
- Value Chain Analysis
A disaggregation of the firm into nine strategically relevant activities, five primary and four support, to locate where cost is incurred and differentiation is created, on the premise that advantage lives in activities, not in the firm as a whole.
- 7 Powers
Helmer's checklist of the seven conditions that create persistent differential returns. Each power pairs a benefit to the holder with a barrier that stops competitors arbitraging it away, and each becomes available only at a particular stage of a business's life.
- Design Thinking
A human-centred approach to innovation that works from empathy with users through problem definition, ideation, prototyping and testing. Popularised by IDEO and Tim Brown, and taught worldwide through the Stanford d.school's five-stage model.
Playbooks that work the problem
- Launching a Product
A launch sequence built on one hard-won lesson: work out what customers would actually hire your product to do before your enthusiasm spends the budget. Job, proposition, beachhead, then a rhythm of cheap tests once you are live.
- Deciding Under Uncertainty
Four frameworks for decisions the spreadsheet cannot settle: work out what kind of problem you are actually facing, rehearse the futures it could land in, price the choice branch by branch, then let the team fail the plan on paper while it can still be changed.
Neighbouring patterns
- Licensing and Franchise
Letting other people run your business with their own money, under your name and your rules, in exchange for a fee and a royalty, which turns a system you have proved into an asset that grows without you hiring anybody.
- Unbundling
Most companies are three businesses wearing one badge: finding and keeping customers, inventing products, and running infrastructure at scale. Each wants a different cost base and a different pace, so holding all three under one roof means at least two are being run badly.
- Free and Freemium
Giving something substantial away at no charge so that somebody else pays for it: an advertiser, a subset of users who upgrade, or the same user later, which works when the free thing costs almost nothing to reproduce and fails quietly when it does not.
What the critics say
The central claim of novelty does not survive examination. Trott and Hartmann argue that firms have collaborated, licensed and acquired external technology throughout the twentieth century, that the closed model Chesbrough contrasts his with is a straw man assembled from a handful of exceptional corporate laboratories, and that open innovation repackages an established literature on networks and absorptive capacity under a new label.
Trott, P. and Hartmann, D. (2009) 'Why Open Innovation Is Old Wine in New Bottles', International Journal of Innovation Management, 13(4), pp. 715-736.
Openness has a cost curve that the advocacy literature underplays. Reviews of the empirical work find the relationship between external search breadth and innovation performance is curvilinear: beyond a moderate level, more openness reduces performance, because attention, coordination and integration are finite. More open is not better, and the optimum is well short of the maximum.
Laursen, K. and Salter, A. (2006) 'Open for Innovation: The Role of Openness in Explaining Innovation Performance Among UK Manufacturing Firms', Strategic Management Journal, 27(2), pp. 131-150.
The pattern depends on a capability it rarely discusses. A firm can only recognise and use external knowledge in proportion to the related knowledge it already holds, so cutting internal capability to fund external acquisition destroys the very thing that made acquisition work. Open strategies pursued primarily as cost reduction reliably fail for this reason.
Cohen, W. M. and Levinthal, D. A. (1990) 'Absorptive Capacity: A New Perspective on Learning and Innovation', Administrative Science Quarterly, 35(1), pp. 128-152.
Sources and further reading
- Chesbrough, H. W. (2003) Open Innovation: The New Imperative for Creating and Profiting from Technology. Boston, MA: Harvard Business School Press.
- Chesbrough, H. W. (2006) Open Business Models: How to Thrive in the New Innovation Landscape. Boston, MA: Harvard Business School Press.
- Dahlander, L. and Gann, D. M. (2010) 'How Open Is Innovation?', Research Policy, 39(6), pp. 699-709.
- Osterwalder, A. and Pigneur, Y. (2010) Business Model Generation. Hoboken, NJ: John Wiley and Sons, pp. 108-119, which presents open business models as a pattern and credits Chesbrough.