Yellow-Red-Blue, Wassily Kandinsky, 1925, Musee National Art Moderne, Paris
Ideas for Leaders #432

Is There an Open Business Model Right for Your Company?

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Key Concept

As open business models, in which knowledge, competencies and resources from external firms are integrated into the business model of a company, become more widespread, companies with traditional closed business models are striving to determine if they should follow suit, and when. By understanding the antecedents of open business models — the internal and external factors that encourage or require the move to openness — companies can make a more informed decision on whether (and when) to change and adapt their business models.

Idea Summary

Traditional closed business models still dominate in today’s business world, but more and more companies are looking at the opportunities created through open collaboration and exchange with business model partners. Pioneering companies such as SAP put themselves at the centre of a vibrant ecosystem of active partners.

The question for corporate executives is when to take steps in this direction and exactly how. The study of open business model firms can help to answer this question by revealing the antecedents of open business models: the external and internal factors that promote openness. Through multiple case studies involving eight major firms with open business models, a team from the University of St Gallen identified five such antecedents:

  1. Business Model Inconsistency. This occurs when elements of a business model — the customer value proposition, processes, and revenue model — are not aligned. The world market leader in food processing machines, Switzerland-based Buehler wanted to compete in emerging markets, but its expertise in food processing machines was not enough; it needed a partner firm with expertise in nutrients and production know-how to fill out a business model that worked for emerging markets.
  2. Need to Create and Capture New Value. UK pharmaceutical manufacturer Shire didn’t have the massive R&D resources required to compete with Big Pharma. It was still able to keep pace in the industry by leveraging its partnerships to acquire new ideas, know-how and technology. The result: a stream of innovative products.
  3. Previous Experience with Collaboration. This is key to making open business models work. SAP is one company in which close involvement with its partners, including more than 3000 resellers and 1700 service partners, is standard.
  4. Open Business Model Patterns. Are there examples in other industries that can be emulated? Procter & Gamble’s foray into open business models was triggered by the examples set by major companies such as Eli Lilly and IBM.
  5. Industry Convergence. Sometimes the boundaries between industries can become blurry (either as a result of new technology or the entry into the market of a powerful corporation). Auto making and high tech came together as BMW and high-tech company Immersion collaborated to create BMW’s revolutionary iDrive on-board control system.

Business Application

These five antecedents offer guidelines for when and to what extent openness should be introduced. The first step, however, is to understand the four levels of open business models. The Open R&D and open innovation business models are limited to the R&D function of the company. The difference is that with open R&D, openness with partners plays a minor role; with open innovation, the firm is highly dependent on openness.

Open business architecture and the fully open business model extend beyond R&D to other functions of the company. The difference again is the importance of openness in the strategy. In the fully open business model, the dependence on openness is at its highest level.

Which of these four open business model options is right for your organization? This is where the antecedents can help. Different antecedents call for different open business models, although often more than one.

For example, the business model inconsistency antecedent usually calls for openness to extend beyond R&D; missing elements in your business model most likely involve other functions. On the other hand, if your business model innovation is being driven by the need to create and capture new value or by industry convergence, openness in your R&D function might be enough to respond. But not always. If the convergence dramatically changes the industry, for example, you may need help in a variety of functions.

Pushing openness throughout the firm is a risky step, however, which is why companies with previous experience with collaboration and open business model patterns antecedents are more likely to attempt the high dependence on openness required by the open business architecture and fully open business model.

The process of matching antecedents with business models is neither simple nor obvious. However, by identifying the situations that apply to your company — whether you have previous experience with collaboration, whether other companies in your industry have open business models, whether new market entrants are dramatically reconfiguring your industry, to take just three examples — will lay the groundwork for discussion and help frame potential business model solutions.

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Authors

Institutions

Source

Idea conceived

  • March 2014

Idea posted

  • August 2014

DOI number

10.13007/432

Subject

Real Time Analytics