Background: In the just-published Open Innovation: The New Imperative For Creating And Profiting From Technology, Henry Chesbrough of HBS discusses how, when, and why the shift from Closed Innovation to Open Innovation happened, using case studies from such companies as Xerox, IBM, Lucent, Intel, Milennium Pharmaceuticals, and others. In the third and final part of the interview, below, Dr. Chesbrough expands on the importance of the business model in innovation.

IdeaFlow: What is the role of the business model in innovation?

Henry Chesbrough: The business model is a cognitive device to convert technical aspects of a product or service into economic value. Any successful innovation (vs. invention) needs a business model, and that model must do two things: first, it must create value in its ecosystem, and second, it must capture a portion of that value for the innovator, so that additional advancements will be forthcoming.

IdeaFlow: In Open Innovation, you mention that "R&D personnel should be educated on the company's business model." How to do that? And do you also think business managers should be educated on innovation?

HC: I ran a series of workshops at PARC two summers ago, to teach research managers there about business models. These were very popular, and the attendance for each workshop was higher than the last one. A couple of axioms emerged from those workshops that have permeated PARC culture. One is about “finding the customer’s pain”, while another is “a small piece of a big pie is worth more than a large piece of a small pie”. A colleague of mine at HBS, Dick Rosenbloom, held a series of offsite meetings a few years earlier. It definitely can be done, and research managers are actually great students. They read, they think, they challenge, and they learn.

As for business managers, I definitely think they should be educated on innovation as well. The market is the final test of any innovation, and the business types are always the closest to the market. If they are not trained in innovation and motivated to listen, a great deal of value will be lost.

IdeaFlow: I see you using the business model as a framework within which to create and innovate.

HC: Yes, that is a good viewpoint for business models. They provide a cognitive framework – a mental model - for how technology turns into money. Take Xerox's copiers. Xerox made more money when their copiers worked faster, in higher volumes. They became world-class in making really fast copiers. However, a whole segment of the market went unserved by Xerox, the personal copiers. Xerox's mindset for making money from its really successful business model induced a myopia towards a new alternative market. And in order to make money from small businesses and individuals, one has to think differently about the business.

IdeaFlow: Making sure everyone in a company is completely schooled in the business model...isn't that a tall order? And it would need to be everyone, wouldn't it?

HC: Actually, I think that the company's "culture" indoctrinates most everybody in how the company operates and implicitly, how it makes money. But too much is hidden, and unspoken. Articulating the business model explicitly can expose obsolete assumptions and enable the exploration and discovery of new models, which wouldn't necessarily arise if the business model is kept under wraps.

IdeaFlow: Just thinking of places I've worked (admittedly, mostly this has been the media!)...I can't say I always knew exactly *what* our business models were!

HC: The media have an interesting model. Most periodicals do not charge their full costs to subscribers. They prefer instead to subsidize circulation and charge advertisers instead to make up the difference. They divorce their editorial from their advertising, though you probably know of many instances when this was observed in the breach rather than the practice. So there is an interesting and fundamental tension between how media attract an audience (via editorial independence) and how they attract advertisers (via delivering the messages of their advertisers). Some companies, like Fox News, appear to be dropping the veil, and acknowledging the connections between their editorial and their advertising more directly. And Rupert Murdoch has played that game (very well, I might add) for many years.

IdeaFlow: I do think there is a big difference in being indoctrinated in the culture and understanding how the business model works, and I wonder if anyone is really thinking about the best way to train people or the best way a corporate culture can be fostered so that the business model is top-of-mind with everyone.

HC: That is part of the movement we must start. Because if you are right that no one is really thinking about this, then all those businesses are running on auto-pilot, following the decisions of past executives in their own company, and following the herd in their own industry.

IdeaFlow: Whereas there are seemingly a ton of people who can lead seminars on innovation techniques, though obviously some much more successfully than others.

HC: Well, I don't know about every innovation technique, to be sure. But I do know this: Most innovations fail, and companies that don't innovate, die.

IdeaFlow: I haven't heard anyone except you place this importance on business model, and it makes a lot of sense to me.

HC: Yes, we heard a lot about business models during the Internet phase. And when the Internet bubble collapsed, business models seemed to go with them. But the business model is a concept that goes way, way beyond the Internet.

IdeaFlow: And it's not just for the suits, it's for the geeks too!

Note: Though this is the last part of the interview, I've submitted some follow-up questions to Dr. Chesbrough from myself and from readers, and I'll post those as soon as I have them.