Open Innovation and Open Business Models: A new ?· Open Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions: 1.

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  • 2006 Henry Chesbrough 1

    Open Innovation and Open Business Models:

    A new approach to industrial innovation

    Presentation to Joint OECD/Dutch Ministry of Economic Affairs

    Conference on Globalization and Open Innovation

    Dec. 6, 2006Henry Chesbrough

    Haas School of BusinessUC Berkeley

  • 2006 Henry Chesbrough 2

    Agenda

    Open Innovation Open Business Models Implications for Managing IP Policy Implications

  • 2006 Henry Chesbrough 3

    The Current Paradigm: A Closed Innovation System

    ResearchResearchInvestigationsInvestigations

    DevelopmentDevelopment New ProductsNew Products/Services/Services

    TheMarket

    Science&

    TechnologyBase

    R D

  • 2006 Henry Chesbrough 4

    CurrentMarket

    InternalTechnology

    Base

    R D

    The Open Innovation Paradigm

    Technology Insourcing

    New Market

    Technology Spin-offs

    ExternalTechnology

    Base

    Other Firms MarketLicensing

  • 5 C 2002 Henry Chesbrough EIRMA SIG III, 2005-10-20

    Robert Kirscbaum, DSM: Research & Technology management, July August 2005

    License in

    Spin in

    Acquire

    DivestSpin out

    License out

    The creation of new businesses is a highly dynamic process, best represented as a horizontal funnel (passed in iterative steps)

    Open innovation in practise

  • 6 C 2002 Henry Chesbrough EIRMA SIG III, 2005-10-20

    Closed innovation

    Our currentmarket

    Our new market

    Other firmsmarket

    Open innovation

    External technology insourcing

    Internaltechnology 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

  • 2006 Henry Chesbrough 7

    CurrentMarket

    InternalTechnology

    Base

    R D

    IBM & Open Innovation

    Technology Insourcing

    New Market

    ExternalTechnology

    Base

    Other Firms Market

    Java,Linux

    Sun, and others eqmt

    $1.9 B licensing,OEM for semi cosODM for others

    Global Svcs

  • 2006 Henry Chesbrough 8

    CurrentMarket

    R D

    Is this just for High Tech?Procter &Gamble

    New Market

    Use it or Lose it

    ExternalTechnology

    Base

    Other Firms Market

    TechnologyScouts

    InternalTechnology

    Base

    VentureAcquisitionsSpinbrush

    LargeAcquisitionsGillette

  • 2006 Henry Chesbrough 9

    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 of the smart people in the world work for us.

  • 2006 Henry Chesbrough 10

    Agenda

    Open InnovationOpen Business Models

    Implications for Managing IP Policy Implications

  • 2006 Henry Chesbrough 11

    Which Would You Rather Have?

    A Better Technology

    Or,

    A Better Business Model

  • 2006 Henry Chesbrough 12

    Go with the Business Model

    Business Model > Technology Ability to profit from technology Ability to scale technology Ability to continue innovating technology Ability to acquire technology

  • 2006 Henry Chesbrough 13

    IBM: Its Closed Value ChainV

    alue

    -Add

    ed A

    ctiv

    ities

    Materials

    Chips, devices

    Computers

    Operating Systems

    Applications

    Productivity SW

    Atoms

    Solutions

    Value Chain

    All IBM pre 1993

  • 2006 Henry Chesbrough 14

    IBMs Open Business ModelV

    alue

    -Add

    ed A

    ctiv

    ities

    Materials

    Chips, devices

    Computers

    Operating Systems

    Applications

    Productivity SW

    IBM Chain OEM Market

    Materials

    Chips, devices

    Computers

    Operating Systems

    Applications

    Productivity SW

    Integration

    Atoms

    Solutions Other Integrators

  • 2006 Henry Chesbrough 15

    IBMs 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

  • 2006 Henry Chesbrough 16

    Agenda

    Open Innovation Open Business Models

    Implications for Managing IP Policy Implications

  • 2006 Henry Chesbrough 17

    The Role of IP in the Business Model

    A business model has two functions:1. Value creation2. Value capture

    IP is critical for value capture in many business models

    IP can also be valuable in creating value Setting standards Intellectual commons Defining the space for the innovations of others

  • 2006 Henry Chesbrough 18

    Fig. 4.1Evaluating Technology Alignment with Patent Coverage

    Patent Coverage

    Technology Coverage

    UnusedProtectionRegion

    ProtectedRegion

    Unprotected UseRegion

    Party 1

  • 2006 Henry Chesbrough 19

    Fig. 4.2Complex Technology Alignment with Patent Coverage,

    when Two Parties Have Conflicting Claims

    Patent Coverage

    Technology Coverage

    Party 1

    Patent Coverage

    Technology Coverage

    Party 2AssertionRegion

    ImpairedRegion

    InfringementRegion

  • 2006 Henry Chesbrough 20

    Fig. 4.3Complex Technology Alignment with Patent Coverage,

    when Second Party does not Practice Technology

    Patent Coverage

    Technology Coverage

    Party 1

    Patent Coverage

    Party 2Now Irrelevant AssertionRegion New Infringement

    Region

    InfringementRegion

  • 2006 Henry Chesbrough 21

    Fig. 4.5IP Mapping Value Chain Analysis: Printers

    Controllers

    Print Heads

    Lasers

    Sensors

    Repair and ServiceEquipment Installation Consumables Operation

    Enabling Technology

    Manufacturing

    Integration

    Site Prep

    Assembly

    Ink

    Paper

    Testing

    Connectivity

    Programming

    Monitoring

    Quality Control

    Scheduling

    Diagnostics

    Testing

    Procedures

    Parts

    = Moderate IP risk

    = Strong IP position (possible assertion opportunity)

    = High IP risk

    = Low IP risk

  • 2006 Henry Chesbrough 22

    The IP Management Life Cycle

    Stages in the Technology Life Cycle

    Emerging

    Growth

    Maturity

    Decline

    Time

    Perfor

    man

    ce

    Figure 4.6

    Become the standard

    Compete withinthe standard

    Grow thestandard

    Harvestthe standard

  • 2006 Henry Chesbrough 23

    Managing IP for MS Windows

    Mature market in USWindows has won the war to be the standard So strongly enforce copyright to prevent piracyEvery illegal copy of Windows is money lost

    Growing market in ChinaWindows and Linux still battlingSo do NOT enforce copyright (not yet)Every illegal copy of Windows is one less for Linux

    IP Management Must be Driven by the Business Model

  • 2006 Henry Chesbrough 24

    The IP Management Life Cycle

    Stages in the Technology Life Cycle

    Emerging

    Growth

    Maturity

    Decline

    Time

    Perfor

    man

    ce

    Figure 4.6

    China

    US

    Become the standard

    Compete withinthe standard

    Grow thestandard

    Harvestthe standard

  • C 2002 Henry Chesbrough 25

    Example of recorded reassignment:

    Intellectual Ventures LLC, a technology development and licensing start-up formed by Microsoft veterans Nathan Myhrvold and Edward Jung, has won the bidding for General Magic Inc's portfolio of patents and other intellectual property, paying $300,000.(Wall Street Journal, May 29, 2003)

    REASSIGNMENT INFORMATION

    Date Recorded: July, 25 2003Assignor: General Magic Inc. (Date signed 04/23/2003)Assignee: Intellectual Ventures Patent HoldingReassignment Kind: Assignment of Assignor InterestNumber of Patents reassigned: 20

  • 2006 Henry Chesbrough 26

    USPTO Patent Reassignment DataPatent Reassignments - 1980-2003

    0

    10000

    20000

    30000

    40000

    50000

    60000

    70000

    80000

    90000

    100000

    RY

    =200

    3

    RY

    =200

    2

    RY

    =200

    1

    RY

    =200

    0

    RY

    =199

    9

    RY

    =199

    8

    RY

    =199

    7

    RY

    =199

    6

    RY

    =199

    5

    RY

    =199

    4

    RY

    =199

    3

    RY

    =199

    2

    RY

    =199

    1

    RY

    =199

    0

    RY

    =198

    9

    RY

    =198

    8

    RY

    =198

    7

    RY

    =198

    6

    RY

    =198

    5

    RY

    =198

    4

    RY

    =198

    3

    RY

    =198

    2

    RY

    =198

    1

    RY

    =198

    0

    Rising faster than base of patents itself, from 0.1% to 4.0%

  • C 2002 Henry Chesbrough 27

    Main Reassignment Kinds Assignment (of assignors interest) Security agreement/termination

    Government interest assignment Executive order 9424, confirmatory license Merger Change of Name Other

    From the examination of semiconductor class: Change of Address License Confirmatory license Conveyance of patent & trademarks Correction to an error in the patent number Release by secured party Release of security interest in patents and tradem Release of security interests Security interest Termination and release of assignment of security Transfer by operation of law Amended and restated patent and security agreement and mortgage

    Offered as an option in thePTO 1595 form

  • C 2002 Henry Chesbrough 28

    Reassignments in Semiconductors (H01L): 2003

    Affiliated Co61%

    License1%

    Merging2%

    Other6%

    Securitization23%

    Ind. Inventors1%

    Impure & Autonomous

    3%

    Pure & Autonomous

    3%

  • 29

    Security: US 5149397

    Two reassignments for this patent:Reassignment KindAssigneeAssignorDate

    Security InterestJPMorgan Chase BankXerox06/25/2003

    Security InterestBank OneXerox06/21/2002

    Patent: Fabrication methods for micromechanical elements, originally assigned to Xerox corporation. Application date: 1991.07.03. Date issued: 1992.09.22

  • 2006 Henry Chesbrough 30

    Whats Going On?

    Your findings are consistent with what I have seen. That is, I have seen more security interests being taken in a company's patent rights (typically to collateralize debt).

    The beginnings of a secondary market for IP.

  • 2006 Henry Chesbrough 31

    IP Secondary Markets in the Future

    Orphan recovery programs Failed Startup IP auctions Use It or Lose It corporate policies Bounties and Finders Fees Sale-Leaseback programs Patent roll-up strategies Patent commons areas

  • 2006 Henry Chesbrough 32

    Agenda

    Open Innovation Open Business Models Implications for Managing IP

    Policy Implications

  • 2006 Henry Chesbrough 33

    Policy Implications

    Case Study: US economic malaise in the 1980s Autos Steel Consumer electronics Shipbuilding semiconductors

  • 2006 Henry Chesbrough 34

    US Resurgence in the 1990s

    New companies, new industries PCs, networking, software Internet Biotechnology New kinds of semiconductors

    Note that the troubled firms in the troubled industries did not improve much

  • 2006 Henry Chesbrough 35

    Closed v. Open Policies

    Focus on expanding domestic market

    Protect local champions from foreign competition

    Subsidize largest domestic firms

    Limit foreign students and foreign direct investment

    Focus on SMEs Focus on universities Focus on IP policies Stimulate greater

    competition among largest firms

    Stimulate greater information exchange and coordination

  • 2006 Henry Chesbrough 36

    Getting the Institutions Right

    Public research funding The foundation of the innovation system Focus on excellence, meritocratic award criteria

    IP Clear, effective, but limited protection

    Universities Meritocracy in research funding Allow professors to engage with industry Compete for best and brightest students Enable research to move into industry

  • 2006 Henry Chesbrough 37

    The Challenge of Indirect Policies

    No clear constituency Time delay from policy change to results Interaction among institutional factors, not a

    single factor solution We underestimated strength of US innovation

    system in 1980s We may be underestimating its weaknesses today

    Note that Japan has regained ground, with a very different institutional structure than US

    Note that OECD estimates Chinas R&D > Japan

  • 38

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