Chapter 32

Open Business

The pattern

Adoption of the Open Business model often marks a fundamental paradigm shift in a company’s business logic. Openness refers to the inclusion of outside partners into normally closed value creation processes such as research and development (HOW?). The precise form such cooperation takes is not set in stone, but being based on the concept of collaboration tends to differ substantially from classic customer–supplier relationships. Companies pursuing the Open Business model try to leave profitable niches for potential partners within the model to enable them to engage in independently gainful business activities (VALUE?). Not without reason is a healthy business ecosystem – often made up of firms that co-exist peacefully using different business models – thriving through cooperating. Such ecosystems often develop around the focal company’s products and services – akin to ‘keystone species’ in biological ecosystems – whose disappearance would destroy the whole ecosystem.

Embracing an Open Business model involves the systematic identification of areas in the value creation processes where other parties can contribute their own resources or use existing resources in new and innovative ways. The aim of opening up a business in this way is to improve efficiency, gain a share of new markets and/or secure strategic advantages (HOW?, VALUE?). The design of an Open Business model requires special consideration on two counts: first, the original business model (and in particular its value chain) must be both internally coherent and attuned to the business models of future partners; second, it is important to ensure that the added value created also benefits the original business. In other words, the conflict of goals existing between one’s own profitability and partners’ objectives must allow a win–win solution (VALUE?).

The origins

Henry Chesbrough was one of the first researchers, in 2006, to conceive of the Open Business model as an independent pattern, as opposed to a closed business model. As such, the creation of this pattern is closely related to Chesbrough’s ‘Open Innovation’ – that is to say, the opening-up of a business’s typically closed innovation activities to allow for the purposeful in- and outflow of knowledge. Rather than working on innovations behind closed doors, companies network and harness the potential of joint ideation. Consumer goods giant Procter & Gamble took these principles to heart when it launched its Connect + Develop programme in 2000. Aiming to improve its own innovative capacity, the company actively seeks out product ideas and knowledge from partners, which they can then bring to market together. For instance, the Mr. Clean Magic Eraser traces back to an industrial melamine foam developed by BASF. It was sold as an all-purpose sponge in Japan and noticed by a Procter & Gamble ‘scout’. An agreement with BASF secured the technology for use at Procter & Gamble. The Mr. Clean brand benefited greatly from this new product, and rapidly spawned a whole range of cleaning products developed in collaboration with Butler Home Products. Butler provided product ideas and production capacity, while Procter & Gamble contributed with its brand name and distribution network. Stories of such mutually beneficial partnerships are a dime a dozen at Procter & Gamble, for over half the corporation’s new products are developed through such collaboration and partnerships. They have by no means been limited to exchanging technologies, ideas and production capacities: distribution networks and brands are all shared, exemplifying the progression from Open Innovation to a fully Open Business model.

The innovators

Openness can have a significant impact on the business model of a company beyond opening up research activities. IBM, for instance, in its often-cited metamorphosis from product to service provider, decided to stop developing its own operating system. Instead, it now actively participates in advancing the Linux Open Source system. With this move, IBM reduced its development costs by 80 per cent, while its server business, which profited from its seamless compatibility with the increasingly popular free Linux operating system, received a healthy boost. IBM’s intimate knowledge of Linux helped its new services business to flourish, and the company’s turnaround in the late 1990s was in large part due to its increasingly Open Business model.

Valve Corporation, a video game developer and distributor based in Bellevue, Washington, benefits in two ways from its Open Business model. On the one hand, the company decided to build its debut first-person shooter game ‘Half-Life’ in 1998 in such a way as to make it possible for technically minded players to easily create modifications (mods) for the game. Thanks to the active support of Valve Corporation, an ecosystem of developers who brought their own first-person shooters to market was created. Among these developers were the creators of ‘Counter-Strike’, one of the most successful video games of the Internet era that led to the creation of highly popular professional gaming leagues in Asia. Valve then repeated its Open Business model success with Steam, its digital video game distribution platform. In contrast to its competitors, who reserved their distribution channels for their own products, believing them to be a core competency requiring protection, from 2005 onwards Valve permitted any game developer in the world to use Steam to distribute its games in exchange for currently 20 to 25 per cent share of the turnover. At the present time, Steam hosts some 2,000 games from both independent developers and all major game studios. Incorporating the Valve-developed games on Steam in combination with the content of large studios and third parties (with more than 90 million active monthly users), Valve had 18.5 million concurrent players at peak on its platform in early 2018. Interestingly, the most successful games are Valve’s own, which can be seen as a result of its understanding of its platform users’ behaviours and preferences. Thanks to its Open Business model, privately-owned Valve is valued at over US $3 billion, and has been a potential purchasing target of companies such as Microsoft.

Open Business: the business model of Valve

Holcim Costa Rica provides another example of a successful Open Business model. Based on an Open Innovation initiative launched in 2010, Holcim is constantly seeking new ways of collaborating with external partners to create additional value for its customers. One tangible outcome is the community of Los Olivos – the first integrated social and sustainable community in the country. In order to build Los Olivos, Holcim created a platform to integrate solutions from different actors such as construction companies, developers, universities, consultants and social researchers. Opening up its business model enabled Holcim to set a new standard in providing housing solutions for low-income families – an effort that has recently been awarded the Sustainable Construction Prize by the National Chamber of Construction in Costa Rica.

The mechanical engineering company Trumpf attracted attention in 2015 with a business model innovation based on the Open Business model. The goal was to offer a standardised operating system for Industry 4.0. Until now, many manufacturing companies have not been able to network production machines across production lines due to different interfaces, systems and standards. The solution of the newly founded spin-off, Axoom, aims to build an open operating system for the purpose of intelligent value chains, similar to Google’s Android. The software solution enables continuous order processing in production operations. This includes transfer, storage and analysis of data originating from individual production applications. Furthermore, based on this system, Axoom offers an open platform that resembles an app store for the manufacturing world. For example, applications for evaluating sensor data can be integrated in own processes by third parties, providing a development environment and sales channel for commodity vendors and app developers.

When and how to apply Open Business

Opening up your business model and integrating partners into the value creation process is a key element for future growth and competitive advantage. In an increasingly connected world, where industries are converging, you will need to open up to stay successful. Consider developing an entire ecosystem to create the kind of value for your customers that none of the participating companies could provide independently. In order for such ecosystems to function, all partners must generate sufficient revenue and benefits from the collaboration.