Volume 1 : Issue 2

Is an Open Business Model Right for your Business?

Out with the old and in with the new.  More traditional bricks-and-mortar companies are starting to figure out what Internet businesses have known since inception:  focus on what you do best and partner with others who can fill in the gaps.

Managers of traditional companies like having control.  Control over R&D (research and development), manufacturing, distribution channels, marketing…you name it.  But escalating development costs and a shorter product life cycle where obsolescence is the norm are causing these managers to step outside their comfort zone.  They are reluctantly embracing the Open Business Model where they assess what they truly do well and then partner with other organizations to bring their goods and services to market more quickly and less expensively.  For example:

The pharmaceutical industry:  Today, most drug companies keep their intellectual property and trade secrets well protected legally through the U.S. Patent and Trademark Office.  This keeps competitors at bay for a while and drives up the cost of medicine so they can recover their significant R&D investment in that short amount of time when they are protected from competition.   Additionally, thousands of ideas, formulas and packaging ideas sit on the shelf and never see the light of day in the name of protecting what is theirs.  This is a Closed Business Model.  When a firm takes the Open approach, they may find that their true strength as a business is in R&D; therefore, they might broker their findings and concepts to partners whose strengths are in manufacturing, distribution, marketing, etc.  By focusing their efforts on one part of the value chain rather than trying to control each component, more ideas are brought to market on a more timely basis, generating higher profits for all involved.

Some of the country’s most respected companies are coming around to the idea.  In an article by Larry Huston and Nabil Sakkab of Procter & Gamble, they estimated that P&G used only about 10 percent of the patents it held. Embracing a more Open Model, P&G is now licensing technologies from other companies around the world, resulting in products like the Crest SpinBrush, Olay Regenerist, and Swiffer dusters. P&G is also getting money from licensing its technologies to other companies. The result of the Model is that innovation becomes economically attractive again, even in a world of shorter product life cycles.

Although it’s not right for every organization, the Open Business Model is proposed as one way that some companies can keep up with the consumer’s ever changing demand.  It acknowledges that there is value not only in the final good or service produced, but also in the intermediate steps that require the most innovation.  At first blush, it seems counterintuitive for a company like P&G to “give away” hard earned intellectual property, but they would rather benefit from all their innovation and share the wealth with others than to receive their profits from only 10% of their ideas.

If you would like to determine if an Open Business Model might be the right strategic move for your business CONTACT US. 

This article was authored by Jennifer Hendrickson, President of Hendrickson Business Advisors, LLC.