Thursday, May 18, 2006

Is licensing your brand a good way of practicing Open Innovation?

In Open Innovation, there are a lot of possibilities for leveraging innovations outside your company for your own profit. One extreme is to slap your brand on someone else's product. Another extreme is inventing a modular system with components that come from other companies. There are a lot of other possibilities too, but the one I want to talk about here is slapping your brand on someone else's innovation. What are the pros and cons?

Pros

  • Risk sharing

    "brand licensing can be a tool for sharing risks and improving the odds that risk-adverse larger companies can leverage the innovations and technologies of risk-taking entrepreneurs" (Mike Docherty, INNOVATION.NET WEBLOG)


    If a rising corporate star brings forth a risky innovation that ends up failing, his career is apt to be damaged considerably more than that of the executive who squelches an innovation that could have been a winner. An open innovation model diminishes both the error of squelching a winner (a false negative) and of backing a loser (a false positive). (John Seely Brown)




Cons

  • Diminishing margins - The new book cited below tells a story about IBM's PC that beat the PARC Star computer because IBM embraced Open Innovation. But eventually IBM took it to such an extreme that all it was providing was the brand. In fact, a couple of years ago they sold the entire business to some company in Taiwan called Lenovo along with rights to the brand name "IBM" for 5 years). Taking it to such an extreme resulted, according to the book below, in IBM losing to the Wintel platform that didn't exclusively rely on Open Innovation.

    By itself, open innovation results in razor-thin profits from products that compete as commodities. ("Breakthrough: Stories and Strategies of Radical Innovation" by Mark Stefik and Barbara Stefik)




I tend to agree that slapping your company's brand on someone else's innovation is an unsustainable model. Why do you think Intel came out with its famous "Intel Inside" marketing campaign; they thought they could claim a larger portion of the margin of PC sales if their brand became more important to the computer than the brand of the rest of the computer. IndustryWeek had something similar to say:

"External ideas can help create value, but it takes internal R&D to claim a portion of that value for you." (IndustryWeek)


However if your brand is something that you must invest in to maintain its value, then it's a different story. If you are a pharmaceutical company that spends a lot to advertise that your brand means safety, it will be hard for the external technology provider's brand to eclipse yours. Also, sometimes when we talk about leveraging your brand, I think what we're really talking about is leveraging your market distribution channel. P&G, for instance has a great brand and it practices Open Innovation. You might be tempted to say their main value-add is their brand that they can leverage to give a small-time inventor more credibility with consumers. That is true, but their market distribution channel is also significant value that P&G brings to the table when it embraces an external innovation.

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