By 1990, Procter & Gamble had enjoyed a long history of successful internal innovation. It was a large company with a strongly institutionalized Research & Development department that churned out innovations that were then turned into products for the marketplace. Everything was proprietary and was done in-house.
But in 2000, when P&G found itself losing money and its stock price dropped by 50 percent, the new CEO, A.G. Lafley, introduced a program called “Connect and Develop” aimed at changing the way P&G innovated. He declared that the company would now get fully half of its new ideas from external sources. In an organization that coined the phrase “‘not invented here’ was invented here,” this was a big and difficult step. But among the early successes were the Crest SpinBrush and the Swiffer brand mop.
As Henry W. Chesbrough explains in his new book, Open Business Models,1 these difficult transformations changed a large, inward-looking organization into an open, outward-facing culture that completely revamped the way the company created value. In the process, P&G doubled the number of people working on innovation for P&G, at no additional cost. How is that possible? Because half of those people are actually outside the company’s boundaries.
This approach has become known as the “open source” business model, taking its name from open source software development, in which numerous volunteers create the end-product. This model has given us such pace-setting products as the Linux operating system and the Firefox Web browser.
Today, the underlying concepts of the “open source” business model are spreading to just about every area of business and spawning voluminous Web resources for those who are interested in exploring the model for their own businesses.
People who have spent their careers in a traditional business environment may at first find the concept of an open source business model confusing. How does a company capture a significant enough portion of the value created by such a business in order to earn a decent ROI?
The answer can be seen in examples such as Linux, Apache, Netscape, Java, Perl, TCL, Sendmail, and numerous other technologies. Those are all examples of software products that were given away for free to create a new environment in which the company...
