March 10, 2009

Open innovation by acquisition

One of the key issues we faced in working on our 2006 book was coming up with a newer and more precise definition of “what is open innovation.” Henry Chesbrough wrote a revised definition that we used in the opening chapter; I’ve elaborated on this broader question since then.

However, one of the corner cases we wrestled with was open innovation by acquisition. This classification question was raised in Chapter 4, in the analysis of digital amplifiers written by Jens Frøslev Christensen.

In such cases, the innovation takes place outside the boundaries of the firm. Once acquired, the innovation has become vertically integrated (in a Chandlerian since) within the boundaries of the firm.

One of the big innovation stories in the news this week is a culmination of Roche’s $20b offer to buy the remainder of Genentech. This paragraph from this morning’s WSJ interpreted it as representing a broader trend:
Large pharmaceutical companies are abandoning the notion that they could build new drug pipelines on their own. Instead, Merck & Co., Pfizer Inc., and Roche have each placed huge bets that biotechnology companies are their best path to future sales gains.
If a big pharma firm partners to distribute compounds developed by startup biotech companies, that’s clearly open innovation. If they buy their former partner, it seems as though the openness is historical but not ongoing.

It would appear that the open innovation ends once the vertical integration begins. Or, as I’ve sometimes told students, open innovation is defined as “not vertical integration.”

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