Innovating Business Models with Co-Development Partnerships

By Chesbrough, Henry; Schwartz, Kevin | Research-Technology Management, January/February 2007 | Go to article overview

Innovating Business Models with Co-Development Partnerships


Chesbrough, Henry, Schwartz, Kevin, Research-Technology Management


Companies can build stronger business models if they assess their own capabilities and the context for a co-development partnership.

OVERVIEW:

Business model innovation is vital to sustaining open innovation. External technology partnerships allow open business models to accomplish even more. One important mechanism for innovating one's business model is through establishing co-development relationships. The proper character of these relationships varies, depending on the context for the relationship. To sustain co-development relationships, one must carefully define the business objectives and align the business models of each firm. One should also determine whether the various R&D capabilities are core, critical or contextual. The decision to partner externally will have different implications for each of these.

KEY CONCEPTS: open innovation, business models, co-development, technology partnerships.

Open Innovation is a new approach to industrial R&D that has delivered important benefits to companies that have adopted it, as reported by Procter & Gamble (1) and Air Products (2).

This article's first author has defined Open Innovation as ". . . the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively" (3). His new book, Open Business Models, advances the idea of innovating the business model itself, not just the technologies that feed into the model (2). This requires new approaches to intellectual property management, licensing, spin-offs, and other methods to absorb more external ideas into the company, and to create more pathways for ideas to go to market outside of the company.

Co-development partnerships are an increasingly effective means of innovating the business model to improve innovation effectiveness. These partnerships embody a mutual working relationship between two or more parties aimed at creating and delivering a new product, technology or service.

The potential for business model innovation via co-development is significant. Traditional business models center around the idea of developing a product from internal technology (R&D) and then producing, marketing and selling that product oneself. The use of partners in the research and/or development of a new product or service creates business model options that can significantly reduce R&D expense, expand innovation output, and open up new markets that may otherwise have been inaccessible (4).

Millennium Pharmaceuticals is an example of a company that from its inception built its entire business model around co-development. When Millennium was created, its founders realized that they did not have the capital and scale to take multiple new drugs through the 10-year or more development process required in order to gain Food and Drug Administration approval. So, they focused on the early portions of drug development only and partnered with larger firms such as Pfizer and Merck to handle the later stages of drug development (e.g., clinical trials and commercialization). Hence, Millennium's early business model became one of technology licensing rather than selling drugs to consumers. As it grew, however, it was able to evolve its business model and eventually become a direct (and successful) competitor with its former partners in the full drug development business, leveraging new co-development relationships for other parts of its business (4).

As Millennium (and many others) have demonstrated, when well conceived and well managed, co-development (or co-dev, hereafter) can increase the return from internal R&D, by leveraging the capabilities of a partner firm. However, such partnerships can also pose significant hazards and may doom a business model to failure if they are poorly designed or implemented.

Designing the Effective Model

The first requirement for designing a business model that leverages co-development partnerships is to define the business objectives for partnering.

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