Lecture Prof Henry Chesbrough Open Innovation

Open Innovation:A New Paradigm for Industrial

R&DPresentation to

National University Ireland - GalwayHenry Chesbrough

Center for Open InnovationUC Berkeley

November 12, 2009

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The Current Paradigm:The Current Paradigm:A Closed Innovation SystemA Closed Innovation System

ResearchInvestigations

Development New Products/Services

TheMarket

Science&

TechnologyBase

R D

3

CurrentMarket

InternalTechnology

Base

R D

The Open Innovation Paradigm

Technology Insourcing

NewMarket

Technology Spin-offs

ExternalTechnology

Base

Other Firm’sMarketLicensing

Open Innovation

Our currentmarket

Our newmarket

Other firm´smarket

External technologyinsourcing

Internaltechnology base

External technology base

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

Internal/externalventure handling

License, spinout, divest

Philips Research,Ronald Wolf, 10/08

2003: We broke up the fortress …

Philips Research,Ronald Wolf, 10/08 6

Bringing in the right partners – Open innovation

> 75 companies and> 7000 people atHigh Tech Campus Eindhoven

Researchinstitutes

Economicdevelopmentcompanies

Corporateinnovators

Consultancy& services

Philips Research,Ronald Wolf, 10/08

The expansion of the corporate funnel

Front – end Development Commercialization

InsourcedIdeas /Technology

ODM

OEM

Spin inStart upsIP insourcing

Incubators Spin outIP Licensing

Acquisitions

Alliances

BP’s challenge in February 2006

• Energy Bioscience looked promising (Senior Executive buy-in)

• How do we meld commercial/technology strength withbiology/biotech?

− The company had no bio-expertise

• How to reach out to biology/biotech communities

− Not a corporate lab!

− Corporate labs too insular – can’t tap broader expertise in arapidly moving field

− Where was the Energy/Bio talent pool anyway?

− Not the usual university research programme

− BP does many of these and knows strengths/weaknesses

− Need to facilitate the development, demonstration, andcommercialization of research results

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Lawrence BerkeleyNational Laboratory

OtherBP Components

UC BerkeleyHost Institution

University of IllinoisUrbana-Champaign

OtherEntities

contracts contracts

subcontractscontracts

contracts

ENERGY BIOSCIENCES INSTITUTE (EBI)OPEN RESEARCH

BP R&TPROPRIETARY RESEARCH

subcontracts

Funding for Open and Proprietary Components

$50M/yr

$35M/yr

$15M/yr

BPProprietary Component

Licensing provisions

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For inventions solely owned by UCB, UIUC and/or LBNL

NON-EXCLUSIVE

Non-exclusive, royal free (NERF)license in BP’s area of interest,providing:

- BP will diligently pursuecommercialization

- BP will underwrite the patentcosts

EXCLUSIVE

BP may obtain exclusive licenserights to sole or joint inventions.

- pre-negotiated capped fees

- “Bonanza clause” in case ofextraordinary commercial success

© 2008 Henry Chesbrough 11

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: 8/1998-3/2000P&G Stock Price

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50

60

70

80

90

100

110

120

130

9/17/1998

10/1/1998

10/15 /1998

10/29 /1998

11/12 /1998

11/26 /1998

12/10 /1998

12/24 /1998

1/7/1 999

1/21/1999

2/4/1 999

2/18/ 1999

3/4/1 999

3/18/1999

4/1/1 999

4/15/1999

4/29/ 1999

5/13/ 1999

5/27/1999

6/10/1999

6/24/ 1999

7/8/1 999

7/22/1999

8/5/1 999

8/19/1999

9/2/1 999

9/16/ 1999

9/30/1999

10/14 /1999

10/28 /1999

11/11 /1999

11/25 /1999

12/9/ 1999

12/23 /1999

1/6/2 000

1/20/ 2000

2/3/2 000

2/17/ 2000

3/2/2 000

3/16/2000

3/30/ 2000

Pri

cep

ersh

are


Searching for the Root Cause

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

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

– SpinBrush, Swiffer, Regenerist

| 14| 14

A.G. LafleyPresident and CEOP&G

“We will acquire 50% of ourinnovations from outside P&G”

Jeff Weedman28 External Business Development managers

VP, External Business Development

“We don’t care where good ideas come from.”

Larry Huston (just retired)120 Technology Entrepreneurs

VP, Knowledge & Innovation, Corporate R&D

Nabil Y. SakkadSVP, R&D, Global Fabric & Home Care

“There’s 1.5 Million people in the world whoknow about my business. I want them on my

team”

Example: Proctor & Gamble

| 15| 15

P&G Share Price Restored!


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 openinnovation partner of choice

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CurrentMarket

R D

Not Just for High Tech:Procter & Gamble

NewMarket

“Use it or Lose it”

ExternalTechnology

Base

Other Firm’sMarket

TechnologyScouts

InternalTechnology

Base

VentureAcquisitions“Spinbrush”

LargeAcquisitions“Gillette”

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An Iberian Example: El BulliAn Iberian Example: El Bulli

• Ferran Adria studies molecular gastronomy, workingwith Herve This, a French physical chemist

• Adria brings this to El Bulli, restaurant is the Lab• Adria launches many business experiments

• Borges: oils, snacks• Lavassa: coffee• N H Hoteles: FastGood, Nhube• Iberian Airlines (with FastGood)

• Careful not to dilute the El Bulli brand

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Is the internal R&D departmentIs the internal R&D departmentan antiquated concept?an antiquated concept?

• No – open innovation can leverage internal R&D• But…..• New focus: must look outside as well as inside• New role: connecting to and collaborating with the

outside• New skill: integrating internal and external together


Challenges facing SMEs

• Less internal R&D capability• Less ability to absorb external R&D• Less “status” as a partner for others• Less market power, weaker ability to

capture value• Less IP (usually, not always)• IP Enforcement often too expensive


Advantages of SmallCompanies

• Size: markets that are too small for large firmscan be attractive

• Focus: greater ability to execute for a specificsegment or set of customer needs

• Specialization: ability to develop deepknowledge of a specific domain

• Entrepreneurial: external focus on results,much less internal “politics”

• Speed: faster decisions, faster execution, fasterresults


Open Innovation Benefits forSMEs

• Large firms increasingly value collaborativepartnerships

• Large firms create platforms that seeksupporting investments from SMEs

• Users (customers) initiate more innovativeactivity, a big opportunity for SMEs

• SMEs can expand geographically now at lowercost, “hidden champions”

• Greater rewards to specialization in OpenInnovation


Where does your business fit?

small large

smal

lla

rge

Market Size

Scal

eof

R&

D

Niche

Specialist

Breakout

Dominant


Winning in the Niche

• Build advantage in a small market– Be highly competent in design, or focus, or

customization, or customer satisfaction– But don’t overinvest, right-size the

investment

• Move fast– Develop new products to keep others out

• Or at least behind


Risks in the Niche

• Obsolescence– Sticking too long with same offering

• Integration with customer– Can customer go around you?

• Weak or no effective protection for yourIP– You invest, others benefit

• What if niche grows too large?


Winning in the Breakout Business

• Here, small R&D investments generatesurprisingly large market opportunities

• SME has the opportunity to breakout as well• Can you create a platform for others to build

upon? (TomTom, MTV, American Idol)• Can you encourage other firms to innovate with

you? (Red Bull, and extreme promo’s)• A key skill: thinking like an architect, or a

systems integrator


Risks in the Breakout Business

• Many businesses don’t scale up well• Large competitors jump in• Partners become competitors• Systems integrator loses control of the

platform


Winning as a Specialist

• High R&D investment to serve a small market• Economics require specialization, and ability

to serve whole market– Not enough volume for multiple competitors

• An attractive area to partner with a large firm– Take over one of their unattractive businesses– Example: Multis in Ireland (reverse logistics)

• Spinoffs: offload underperforming businessesinto companies that can execute them better


Risks of Specialists

• Obsolescence• Departing employees• Management Changes at Key Customers• Market Shift Away from the Specialty

– Travel agencies after the Internet


Winning in DominantBusinesses

• The Land of the Giants: High R&D costs, largemarkets

• Many niche opportunities to complementDominant businesses for SMEs

• Speeding up Dominant Business’s time tomarket

• Partnering with Large Business: “Only way tobecome a big company is to learn how to workwith big companies” - Intel


Risks in Dominant Businesses

• Getting squeezed by your customer• Sustaining collaboration over time• Being acquired by the Dominant partner

– “spin in’s”– How to value fairly such spin-in’s?

• Large firm may lack processes to workeffectively with small companies


Conclusion

• Being an SME is tough– But being a large company can be tough too

• SMEs are not “one size fits all”– Assess where your business fits, Scale of R&D

vs. Market Size• How can you adapt your business model to

improve your business’s fit?• Can groups of SMEs organize to create

breakout businesses?

The Crisis in Copenhagen

• Successor to Kyoto protocol• Disputes over emissions targets….• …. and over access to the IP and technology to

achieve them!• Proposals of $100 billion + are ill-suited to the

times• Can Open Innovation help?

Founding Partner resources:

- brand development (Nike)- legal architecture (Science Commons)- technical implementation (Force.com)- technical implementation (nGenera)- technical implementation (2degrees)- messaging and story (IDEO)- academic outreach (U Washington)- business rationale for sharing (UC Berkeley)

patents

sustainability

• greentech / sustainability patentsrepresent a small portion of the overallportfolio of the average company.• and most companies have little skill orexperience in licensing or sharing them

• retain the essential rights inside thecore business• use a standard offer to license therights via automated transactions• determine exceptions to licensingrequirements

– research– geography– field of use– etc….

Businesses Control the Use of Their Green IP

The Business Benefits of Sharing orExchanging Green IP• Publicity, yes, but there’s much more …• Greater usage of technology to lower costs• Commoditize an input to lower costs• Establish a technical standard to influence the

future development path• Incremental revenues from licensing outside

of your business• Stimulate greater research activity in areas of

value to your business

Open Innovation in Copenhagen?• Private reasons to share or exchange Green IP

– Good business, not just good publicity

• No government action required– Though policy can help stimulate the process…

• Developing nations need not pay for all IPrights– Exchange, share, or license just those they need

• Developing nations innovate too– And these can be shared with other developing

countries

Policy Can Help!

• Provide greater information on availablegreen technologies, whether private orpublicly held

• Offer financial assistance for licensing usefulGreen IP to developing countries– Also technical assistance

• Award prizes for most useful Green IP• Provide tax incentives to stimulate sharing or

exchange of Green IP

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Photo Credits

Flickr: Chess/Fox, Tuesday Night Poker/Rambis, RyanAir/ezreenphotography, Ryan Air New Boeing 787Colours/macrodebs, 332/265/Digg Pirate, The busshelter at the edge of the ocean/goddess_spiral, Flickrtreo ad/Steve Rhodes, Technology - "FutureVision“/$ydney

iStockphoto: 000003004014, 000003062424, 000004293861,000007135639, 000005589058, 000000718722

iPod photo: http://www.apple.com/ipodclassic/

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Documents

Lecture Prof Henry Chesbrough Open Innovation