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. Table 1 lists five possible objectives, and then shows some potential implications of those objectives for the initial design of how to utilize co-dev partners.
Note that key dimensions of the co-dev design vary, depending upon the business objective. This is very important, because the appropriate relationship for one kind of objective may lead to a design that is poorly matched to the requirements to achieve a different objective. A pharmaceutical company such as Merck, worrying about how to compete with a generics maker after its drug goes off" patent, needs to establish a very different co-dev partnership model than a pharma company such as Pfizer seeking a way to bring inhalable insulin (a new form of drug delivery) to the diabetes market.
A second analysis to be performed in formulating effective co-dev structures is to classify the various R&D capabilities of the firm into three discrete categories: core, critical and contextual. …