Understanding the characteristics of a company’s business model and creating a formal structure for it are a good way for the company to evolve over time and continue creating value when the competitive environment changes, according to a research project by Francesco D. Sandulli, professor at the Complutense University in Madrid, and Henry Chesbrough, professor at the Haas School of Business at the University of California, Berkeley. Open business models are seen by some as the best approach when it comes to adapting and creating value. Although this approach would be useful during these turbulent times, many companies still don’t understand the concept very well or the implications of putting it into practice.
In a recent article in the Universia-Business Review, “Open Business Models: The Two Faces of Open Business Models,” Sandulli and Chesbrough describe the two approaches to open business model and examine in detail one of the best-known and most influential restaurants in the world — El Bulli – which offers a classic example of an open business model approach, according to the authors. El Bulli, owned by Spain’s Ferran Adrià, in 1997 received its third Michelin star, and has held on to the glowing rating ever since. In addition, for the fourth consecutive year, El Bulli has been chosen by the well-regarded gastronomic magazine Restaurant as the best restaurant in the world.
This luxurious reputation makes it difficult to get a reservation at the restaurant, located in Roses, in the northern Spanish province of Girona. Every year, the restaurant receives far more reservation requests than it can accommodate – with about one million requests for an annual seating capacity of just 8,000. Of course, it does not help that the famous restaurant closes for half the year to undertake research and development in new flavors and textures. This unique approach has created an international reputation for Adrià as the “alchemist of the kitchen.” Both he and his restaurant are recognized for their research in the realm of molecular gastronomy, in which his studies of the micro-properties of specific foods, species and ingredients have led to the development of unique recipes.
Yet, as the authors explain, much of this gastronomical knowledge does not originate within the organization. “As a paradigm of the purchasing perspective of an open business model, Adrià is among the collaborators in a series of discoveries in molecular gastronomy achieved by Hervé This, a French physical chemist.” Part of Adrià’s success lies in his ability to absorb into the organization the new taste ideas that emerge outside the organization. In addition to discoveries in molecular gastronomics, El Bulli has participated in the INICON project, financed by the European Union, which is aimed at promoting collaboration among scientists, chefs and restaurants. And the restaurateur continues to look outside the organization for knowledge. As the authors note, “Recently, Harvard’s School of Engineering and Applied Sciences agreed to provide El Bulli with scientific and technical knowledge about the configuration of foods, textures and structures.”
El Bulli sets a new standard for companies that want to adapt their business model to the current competitive situation, according to the authors.
Of course, other companies continue to develop open business models, too. In the past, some companies created specific job functions to support a partial open business model, including in the areas of product development and distribution, while the remaining functions continued to be managed according to closed business model principles, the authors point out. More recently, many companies are redesigning every aspect of their business model with the intention of opening it up. But the authors warn that “this approach is not a panacea, and it is not always positive for the company.”
The Nature of Resources
So how can outside resources best be incorporated into an open business model? “It is easier to create value [for others] when your company gives others those resources that are exclusive [to you]; although on some occasions, your company might share resources that are not exclusive, such as open code software,” the authors write.
It is also easier to practice an open business model when the companies that share the resources are not competitors, “since in that case, the capability of the resource is not a restriction. As for exclusive resources, we will more easily be able to capture part of the value created by the company that uses those resources.” That is why companies based on assets — such as trademark, tacit knowledge and intellectual property — use the open business model more often, the authors note.
Regarding a competitors’ resources, the greater their capacity and scalability, the more likely it is that they will support open business models. One example: the technology infrastructure of Unience, a social network of investors in which financial companies can offer tools for managing members’ financial assets. The company’s infrastructure is easily scalable because it is based on Cloud Computing, which means there are fewer restrictions on capacity and it can be shared with many companies. At the same time, the authors write that shared resources must be non-competitive. “This means that sharing a resource with third parties does not reduce the value created by that resource in the business model of your company.”
The Buyer’s Perspective
An open business model can work particularly well using the concept of “open innovation” — where outside organizations can become the source of new ideas and business opportunities for the company. “A growing number of organizations are using external sources for ideas for R&D projects,” write the authors. They note that in 2006, IBM opened its Innovation Jams forum to individuals outside its organization. Created in 2001, the forum allows employees to contribute ideas that are used to support future programs for research and development at the information technology company. This initiative has involved the participation of “13,366 people, and generated 6,674 ideas…. Ultimately, 10 of them received seed financing and were included in IBM’s portfolio of R&D programs.”
Another way to open the business model involves working with external agents who can help validate a company’s new ideas and products. This enables the company to broaden the scale and reach of its experiments and to reduce the resources needed, and even to cut cycle times. For many years, this has been one of the advantages of open source code. Similar practices are spreading to other industries, such as mobile telecommunications, according to the authors.
They also note that open business models can even lead companies to cooperate with competitors. “For example, using the Hi5 social network and the support of a company called Barrabes, 29 small textile companies in Costa Rica have created a stylish [clothing] brand called Abril to market all of their products under one common brand.”
This sort of a business model presents many challenges, however. For one thing, it means that the company’s skill at absorbing new ideas and practices is tied to its ability to look for resources. This search itself, the authors say, cannot be indiscriminate or the process can become a distraction and undermine the intended development of external resources. This potential pitfall has at times snagged the pharmaceutical industry, negatively affecting the ability of some companies to incorporate some external resources.
It is also a mistake to focus one’s search on the potential value of the outside resource alone. Companies must also consider key factors such as the level of trust and commitment on the part of the company that owns the external resource; the degree to which the resource is complementary; and the potential complexity that could be created in order to manage a new relationship [between companies]. As a result, companies are more likely to integrate into their business model resources that are owned by committed and reliable partners; outside resources that complement internal resources and which can be adapted to existing strategy; and resources that can be measured, so that their positive contribution is more certain.
The capacity to integrate these internal and external resources is another important consideration. The authors explain that on balance, the more complex the required integration process, the less suitable these open business models become, although companies can improve their integration abilities. “A company’s integration capability is continuously built via a process of trial and error,” write the authors.
Organizational inertia is another big challenge in open models. The integration of external resources requires that changes be realized within the organization, but a high level of standardization can be an obstacle to carrying out those changes and efficiently integrating external resources.
The Seller’s Perspective
At the same time, the authors explain that the prospect of having a new seller provides many opportunities to leverage the resources of the company within the business models of other companies. This can create new solutions to the always difficult task of maximizing the company’s return on investment. It even enables the planning of investments on a large scale that otherwise might not be justified. For example, IBM has shared the entire open code of Eclipse with the software community, worth some $40 million. “In sharing it, IBM manages to increase the added value and the revenues of their Rational line of products, a suite of development tools that complement the Eclipse open platform.”
In addition, when it is time to define an open business model, it is important for companies to decide how they will share their resources. They must consider, first of all, the opportunity cost of sharing the asset and the uncertainty of the results from the exchange. “The higher the value of the asset, the greater the opportunity cost, and the narrower the open business model should be.” For example, Intel and Apple prefer to bring in the revenues of their technology platforms by themselves, instead of trusting in its potential for innovation and external development.
Uncertainty also plays a key role when it is time to share resources with partners. Given how hard it is to recognize beforehand which partners will be able to use the resources in a valuable way, some companies choose to share their resources with many partners. This is what Telefónica and Microsoft do when they pursue business models that try to create a market with many complementary products. “Individually, the value creation of each partner will be limited, but the joint contribution of the partners is very high.” The authors explain that companies that opt for this sort of open model usually share such resources as knowledge and branding. The costs associated with this process will be lower where there is a more standardized relationship between the partners.
The authors also set out three types of business models based on the degree of opening from both perspectives. First, there are the partially open “buyers,” companies that don’t have the capabilities required for developing a particular resource by themselves, so they adopt resources from third parties in their own business models. Second, there are the partially open “sellers,” companies that share the use part of their resources with other companies. Finally, there are the completely open companies, which use both aspects of an open business model.
The authors explain that El Bulli is a stimulating example of how both aspects of the process work. Despite its fame and recognition, the restaurant loses money, but this is far from being a problem. The authors say that the role of the restaurant “is nothing more than an R&D laboratory which they don’t expect to be profitable by itself. The restaurant generates the knowledge that is needed for the profitable areas in the El Bulli business model.” Other companies can have access to these profitable resources, principally its brand and its knowledge.
In 1999, the restaurant decided to share its knowledge about creating oils, sauces and aperitifs with Borges, the food manufacturer. Borges launched products that were co-branded by both companies. This became a new source of revenue for El Bulli, which concluded similar co-branding agreements with other companies such as NH Hotels and Nestlé. This strategy, based on a small number of close alliances, aims to avoid any loss of control over the brand. The company also prefers to establish deep and long-lasting relationships with its partners, because the resources that it shares with them are technology processes, so they are harder to protect legally.
Without doubt, the El Bulli business model involves an open business model from both perspectives. On the one hand, “the company actively looks for new external sources of innovation in the world of gastronomy. It closes for long periods of time with the goal of finding and absorbing new ideas. That enables the restaurant to stay one step ahead of other restaurants that try to copy its formula for success.” On the other hand, add the authors, “El Bulli markets its brand and its knowledge through a variety of tightly managed relationships that have enabled its brand to penetrate business sectors far beyond the typical business activities of a restaurant. So while the restaurant is not profitable, its overall group of businesses does make money.”