L08 Open Innovation Slides -...

International Competitiveness and Innovation Topic 08: Open Innovation

International Competitiveness and Innovation

Topic 08: Open Innovation


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S06

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Topic 01: Introduction Topic 02: What is Innovation and Why does it Matter?

Topic 03: Managing Capabilities in the Firm Topic 04: Design and Selection Technology Strategies

Topic 05: Knowledge and Technology Sourcing Topic 06: Managing Collaborations and Alliances

Topic 07: The Role of IPR in Protecting Innovations Topic 08: Open Innovation

Topic 09: Sectoral Patterns of Innovations Topic 10: Nations and Innovation Capacity

Topic 11: Public Policy for Promoting Innovation and Competitiveness Topic 12: Globalization of Research and Technology

Topic 13: MNCs and their Global Research and Development Operations Topic 14: International Transfer of Knowledge and Technology

S01 Topic 01: Introduction Topic 02: What is Innovation and Why does it Matter?

Topic 03: Managing Capabilities in the Firm Topic 04: Design and Selection Technology Strategies

Topic 05: Knowledge and Technology Sourcing Topic 06: Managing Collaborations and Alliances

Topic 07: The Role of IPR in Protecting Innovations Topic 08: Open Innovation

Topic 09: Sectoral Patterns of Innovations Topic 10: Nations and Innovation Capacity

Topic 11: Public Policy for Promoting Innovation and Competitiveness Topic 12: Globalization of Research and Technology

Topic 13: MNCs and their Global Research and Development Operations Topic 14: International Transfer of Knowledge and Technology

seminar sessions outline

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agenda

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S04


………………………………what is open innovation? ………closed innovation and industrial ecology of R&D

…..……key principles and benefits of open innovation

………………internal and external corporate venturing

what | closed innovation & R&D | why | spin-in/out


Open innovation is…

A paradigm that assumes firms can and should use external ideas as well as internal ideas, and internal & external paths to market, as firms look to advance their technology.

Firms that can harness outside ideas to advance their own business, while leveraging their internal ideas outside their current operations will likely thrive in this new era of open innovation.

Source: H. Chesbrough (2003, 2006)


endogenous

exogenous


Our current market

Our new market

Other firm´s market

External technology insourcing

Internal technology base

External technology base Source: H. Chesbrough UC Berkeley, Open Innovation: Renewing Growth from Industrial R&D, 10th Annual Innovation Convergence, Minneapolis Sept 27, 2004

Internal/external venture handling

Licence, spin out, divest

Chesbrough’s Open Innovation business model



Open Innovation Principles

Closed innovation Open innovation Hire the best people so that the smartest people in the industry work for us.

Not all the smart people work for us – we need to engage with best inside & outside our company.

To bring new products to the market we must discover them.

External R&D can create significant value; internal R&D is needed to claim some portion of that value.

We need to discover it ourselves to profit from it.

We don’t need to originate the research to profit from it.

Company getting innovation first to market will usually win.

Building a better business model is better than getting to market first.

Industry leaders in R&D investments will discover the best & most ideas & will come to lead the market as well.

Companies that make the best use of internal and external ideas will win.

Control intellectual property to ensure that competitors do not profit from our ideas

Company can profit from others’ use of IP & we should buy others’ IP whenever it advances our own business model.

Source: H. Chesbrough (2003)



Closed innovation Open innovation Hire the best people so that the smartest people in the industry work for us.

Not all the smart people work for us – we need to engage with best inside & outside our company.

To bring new products to the market we must discover them.

External R&D can create significant value; internal R&D is needed to claim some portion of that value.

We need to discover it ourselves to profit from it.

We don’t need to originate the research to profit from it.

Company getting innovation first to market will usually win.

Building a better business model is better than getting to market first.

Industry leaders in R&D investments will discover the best & most ideas & will come to lead the market as well.

Companies that make the best use of internal and external ideas will win.

Control intellectual property to ensure that competitors do not profit from our ideas

Company can profit from others’ use of IP & we should buy others’ IP whenever it advances our own business model.

what | closed innovation & R&D | why | spin-in/out Open Innovation Principles


Closed innovation paradigm (Chesbrough, 2003)

•  Hire the best & brightest so that the smartest people in the industry work for us.

•  To bring new products and services to the market, we must discover and develop them ourselves.

•  The company that gets an innovation to market first will usually win.

•  Industry leaders in R&D investment will discover the best and most ideas & will come to lead the market as well.

•  Control intellectual property to ensure that competitors do not profit from our ideas.



Challenges to closed innovation paradigm

•  Increasing availability and mobility of skilled workers

•  Growth of venture capital market

•  Growth of knowledge base and increasing capabilities of external knowledge suppliers

•  Increasing complexity of products and services

•  Difficulty of R&D pull through to commercialisation

•  Costs and risks of internal R&D

•  More flexibility required inside company

•  Growing pressure on R&D budgets



New industrial ecology of R&D (Coombs & Georghiou, 2002)

•  Historically large corporate laboratories have played a central role in the research & development system.

•  Economic and technological change leading to a “new industrial ecology of R&D” characterised by network relationships and:

- complementary role of smaller companies - outsourcing of some R&D to specialist CROs - increased business funding of university R&D - collaborative R&D - globalisation

•  Innovation process increasingly ‘distributed’ across organisations



Why are technological capabilities increasingly distributed?

•  Increasing complexity of products and services – –  single firms cannot hope to internalise all the scientific and

technological knowledge required to design, develop, manufacture & market modern products and services.

•  R&D is increasingly interdisciplinary in nature – –  encouraging collaboration between organisations with

strengths in different fields.

•  Costs and risks of R&D – –  driving collaboration and division of labour.



Complementary Assets Teece, D. (1986)

•  Successful commercialisation of a technological innovation requires other capabilities or assets for exploitation.

•  These complementary assets include: marketing; manufacturing; after sales support etc..

•  Access to complementary assets that reside outside the firm is increasingly important to successful innovation.



Facilitators of an open innovation system

•  World Wide Web

•  Intermediaries

•  IPR regimes

•  Growth of venture capital market

•  Policy

Firms should look beyond their own boundaries to enhance competitiveness.



The logic of “Open Innovation”

•  Good ideas are widely distributed today. No one has a monopoly on useful knowledge anymore.

•  Innovation is now done within networks of firms, rather than within a single firm.

•  Not all the smart people in the world work for us.

H. Chesbrough (2006)



BeneIits of an open innovation system

•  Leverage in-house knowledge and gain access to new applications.

•  Access specialist techniques and to tap additional manpower.

•  Achieve critical mass whilst remaining lean.

•  Window on the world – more ideas & better ideas.

•  Dynamic SME sector / Entrepreneurial economy.



Internal corporate venturing/ new business development

Rationales:

-  Creating value for shareholders

-  Providing the possibility for a star performer

-  Creating a more business-orientated environment in R&D function

-  Creating new revenue stream where R&D operates with P&L account.



Internal corporate venturing/ new business development

•  Typically sponsors developments that:

–  lie outside the company’s core business, but are potentially valuable technologies that may be spun-out;

–  cannot flourish within traditional company structures (can also be termed as ‘Skunk works’)

•  Internal ‘incubators’ at companies like BT and France Telecom turn technical projects into spin-out companies.



Skunk Works

Used to offer designers tasked with working on advanced or secret projects :

–  a high degree of autonomy

–  unhampered by bureaucracy

•  Companies recognise that if they are to attract & retain the best scientists they have to offer scientific freedom.

•  The name ‘skunk works’ can be traced back to US aircraft manufacturer Lockheed. Here it was created to design & develop the XP-80 Shooting Star, The US’s first production jet aircraft.

•  Skunk works have also appeared in other companies like

Apple, when the Macintosh was first designed.



When should a company consider spinning-out?

•  The technology is potentially valuable •  BUT does not fit well with current portfolio •  AND is not of immediate value to existing businesses.

•  The in-house barriers to developing the technology are high •  AND requires higher flexibly •  OR a more entrepreneurial environment than is available.

•  When a competent and entrepreneurial team exist that wish to pursue the opportunity.



Spinning-in to access external sources of technology

•  Acquisition

•  Licensing

•  Corporate venturing



•  Established company sponsors young firms through equity participation and other resources.

•  Objective is to gain access to new markets, new technologies & new business models.

•  Corporate venture funds of various types: –  fund used in a wholly owned company for direct investment. –  the company may buy equity in an external venture capital fund. –  the fund may be managed by third parties.


External Corporate Ventures


When should a company consider spinning-in?

•  Rejuvenate technology portfolio

•  Provide a ‘window on the world’

•  Bring in new technology and ‘boost’ innovation efforts

•  Shorten time to development to market.

•  Make R&D more cost effective

•  Enhance the potential for long-term profitable growth

•  Increased competitive pressure requires new ways of doing things.

•  It is impractical to develop everything in-house.



Open Innovation: The Next Frontier in R&D

Presentation to ALA 2008

Henry Chesbrough Executive Director, Center for Open Innovation

Haas School of Business UC Berkeley

© 2007 Henry Chesbrough – Accessed via the Internet and presented via “fair use” for educa?onal purposes only – no prin?ng!


The Current Paradigm: A Closed Innovation System

The Market

Science &

Technology Base

R D&E © 2007 Henry Chesbrough – Accessed via the Internet and presented via “fair use” for educa?onal purposes only – no prin?ng!


Great Successes from the Closed Innovation Model

•  The Chemicals Industry – Germany and later US

•  Edison, GE, and the rise of electrification

•  Rockefeller and Standard Oil

•  World War II scientific achievements

•  Chandler: Internal R&D key to the rise of the modern US corporation in 20th century

(Strategy and Structure: Chapters in the History of the Industrial Enterprise, 1962)



Rising Costs of R&D

Then (25 years ago)

•  <$ 30 million for a fab

•  <$ 50 million for a new drug

•  < $ 10 million for a new consumer product

Now

•  > $ 3 billion for a fab

•  > $ 800 million for a new drug

•  > $50 million for a new consumer product



Shorter Shipping Lives

•  Disk drives •  Cell phones •  Generic drugs •  “80% of the senior executives we surveyed

indicated that the productive lives of their strategies were getting shorter.”

»  Chris Zook, HBR April 2007



Diminishing Economies of Scale: US Industrial R&D

by Size of Enterprise

Company Size 1981 1989 1999 2003

< 1000 employees 4.4 % 9.2% 22.5% 22.5% 1,000 – 4,999 6.1 % 7.6 % 13.6% 14.8% 5,000 – 9,999 5.8 % 5.5% 9.0% 7.5% 10,000 – 24,999 13.1% 10.0% 13.6% 13.4% 25,000 + 70.7% 67.7% 41.3% 40.9%

Sources: National Science Foundation, Science Resource Studies, Survey of Industrial Research Development, 1991, 1999, 2001, 2003.



Diminishing Economies of Scale: US Industrial R&D by Size of Enterprise

Sources: National Science Foundation, Science Resource Studies, Survey of Industrial Research Development, 1991, 1999, 2001, 2003.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

1981 1989 1999 2003

< 1000 employees

1,000 – 4,999

5,000 – 9,999

10,000 – 24,999

25,000 +



What changed? Five Erosion Factors

1.  Increasingly mobile trained workers

2.  More capable Universities

3.  Diminished US hegemony

4.  Erosion of oligopoly market positions

5.  Enormous increase in Venture Capital



Hidden Assumptions in the Internally-Focused Innovation System

If I discover it, I will find a market for it.

If I discover it first, I will own it.

The important technologies I will need can be anticipated in advance.

“Misfits” are regrettable, but are a cost of doing business.

The best people in this field work for us.



Type I and Type II: Xerox and PARC

 Designed to minimize “false positive” errors  Ignores risk of “false negative” errors



A Classic Example: the Xerox 914 copier

•  Chester Carlson develops electrostatic method to place toner on paper, a “dry” process for copying documents

•  In 1955, existing processes (wet or thermal) used to make 15-20 copies per day. Machines cost ~ $300.

•  Joe Wilson estimates cost of building dry process copiers at ~$2000

•  Wilson seeks manufacturing and distribution partners –  IBM, Kodak, GE

•  IBM engages ADL to study: “Although it may be admirably suited for a few specialized copying applications, the Model 914 has no future in the office-copying-equipment market.”



Wilson’s Business Model

•  ADL’s study (and the other companies) viewed the dry process technology through a traditional business model –  charge for the equipment (dry technology very high cost) –  charge for the supplies as needed (no savings vs. wet)

•  Joe Wilson ignored these rejections, and took the technology to market through a new Business Model –  $95/ month for first 2000 copies, 4 cents each for additional –  Low barrier for customer trial, Haloid/Xerox bore the risk –  Enormous usage: 2000 copies per day –  Revenues grow 41% compounded for next 20 years



3Com

•  Metcalfe left PARC in Jan. 1979

•  Did consulting work until Feb. of 1981 – DEC, GE, Exxon

•  Brokered alliance between Xerox, DEC, and Intel for IEEE 802 (aka Ethernet)

•  Initial plan: sell to Unix workstations, via direct sales force



Then….

•  As part of consulting, created directory of LAN dealers and VARs across US –  first of its kind –  sold many hundreds of copies at $125 each –  did this for 5 years

•  IBM PC took the world by storm

•  3Com formed, Krause joined from HP –  VCs financed:

•  New plan: add-on boards for IBM PCs, sold through IBM retailers and VARs



Different Financial Processes

Chess: Type I errors •  Plan several moves

ahead •  No new

information needed •  You know what

you’ve got, what opponent has

•  NPV

Poker: Type II errors •  Pay to play •  Pay for new

information •  You discover what

you’ve got, what other players have

•  Options © 2007 Henry Chesbrough – Accessed via the Internet and presented via “fair use” for educa?onal purposes only – no prin?ng!


0

5000

10000

15000

20000

25000

30000

35000

40000 U

S D

olla

rs (m

illio

ns)

Year

Xerox: Great at Chess, Lousy at Poker

Xerox 3Com Adobe Doc Sci Documentum FileNet Komag Objectshare SynOptics SDLI VLSI Sum (10)



Current Market

Internal Technology

Base

R D

The Open Innovation Paradigm

Technology Insourcing

New Market

Technology Spin-offs

External Technology

Base

Other Firm’s Market Licensing



Open Innovation

Our current market

Our new market

Other firm´s market

External technology insourcing

Internal technology base

External technology base

Stolen with pride from Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from Industrial R&D, 10th Annual Innovation Convergence, Minneapolis Sept 27, 2004

Internal/external venture handling

Licence, spin out, divest



The Division of Innovation Labor

•  Open Innovation separates innovation into multiple stages –  From a marathon to a relay race

•  Lab and Test Equipment are Fundamental to this division of labor –  Customer’s ability to verify that spec was met

–  Supplier’s confidence that good product was delivered

–  Enables the innovation baton to be passed efficiently and effectively



IBM: Its Closed Value Chain

All IBM – pre 1993



IBM’s Open Business Model



IBM’s Open Source Business Model

•  Spends about $100M each year on Linux –  50% for general improvement –  50% for specific improvements for IBM gear

•  Others spend another $800M a year

•  IBM creates value through Linux – Also donates development tools, patents

•  IBM captures value through value-added services and software “up the stack”



Procter & Gamble

•  P&G used to be a VERY closed organization –  “We invented Not Invented Here” – J. Weedman

•  P&G financial crisis, in 2000 – Missed a series of quarterly financial estimates

– Stock market lost confidence in the company

– Stock price fell by more than half in 4 months!

– CEO (Jagr) was fired



P&G’s Stock Price: 8/1998-3/2000



Searching for the Root Cause

•  “We fundamentally had a growth problem. Our current brands were performing well. But we weren’t developing many new brands.” – C. Wynett

•  To get new brands, P&G needed to open up.

•  Connect and Develop – SpinBrush, Swiffer, Regenerist



The New P&G

•  Many processes to enable open innovation – Technology scouts – Legal templates for IP, partnering –  Investments in Innovation Intermediaries

•  The Goal Now: Become the open innovation partner of choice



Balancing Internal and External R&D Funding: P&G

100

100 0

0 % from internal

% from External

Westinghouse

Raytheon

TI

Nokia

Hitachi

P&G 2002

Source: Gassmann, v. Zedtwicz (2002)



Balancing Internal and External R&D Funding: P&G

100

100 0

0 % from internal

% from External

Westinghouse

Raytheon

TI

Nokia

Hitachi

P&G

2002 2007

Source: Gassmann, v. Zedtwicz (2002)



Finding Partners: A Massive Filtering Problem

The Unwashed

The Suspects

The Prospects The

Finalists

The Partner(s)



IP Management Innovations

•  Scouting technologies (utilizing public domain information)

•  Two Innovative Intermediaries: Nine Sigma and Yet2.com

–  Outbound email “RFPs”/ Contacts and Competencies

–  Requires (public) Problem Statement from Client

•  A problem well-defined is half-solved

•  Establishes context for potential solutions

•  Must not “tip your hand” to competitors



How can one identify promising sources of innovation (without contamination)?

•  Another innovative Intermediary: InnoCentive

–  Start with public domain Problem Statement

–  Solver Agreement (Solver owns solution being proposed)

–  Private “rooms” on site for Solver to propose solution

–  InnoCentive staff validates potential of idea prior to sharing idea with Client

–  Client pays only for valid solution



Other Innovative IP Intermediaries

Inbound •  Innovation Exchange •  SSIPEX •  YourEncore.com

Outbound •  IpValue, ThinkFire (patents) •  Utek, Flintbox (university technology) •  New Venture Partners, LLC (spinoffs)



Current Market

Internal Technology

Base

R D

Intermediaries & Open Innovation

Technology Insourcing

New Market

NVPLLC: spinoffs

External Technology

Base

Other Firm’s Market

IP Value, Yet2 - licensing

InnoCentive NineSigma Yet2.com

Investment Banks

Sequoia/ Cisco



The Logic of “Open Innovation”

•  Good ideas are widely distributed today. No one has a monopoly on useful knowledge anymore.

•  Financial managers must play poker, as well as chess, to capture the value in false negatives.

•  We must manage IP in order to manage research: –  need to access external IP to fuel our business model –  need to profit from our own IP in others’ business

model

•  Not all of the smart people in the world work for us.



R.I.P

2007

R.I.P

Proudly Found Elsewhere!

A New Perspective Towards R&D

And verified by Lab and Test Equipment!



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