Open Innovation:
A New Paradigm for Industrial
R&D
Presentation to
National University Ireland - Galway
Henry Chesbrough
Center for Open Innovation
UC Berkeley
November 12, 2009
The Current Paradigm:
A Closed Innovation System
Science
&
Technology
Base
Research
Investigations
R
The
Market
Development New Products
/Services
D
2
The Open Innovation Paradigm
Other Firm’s
Market
Licensing
Technology Spin-offs
Internal
Technology
Base
New
Market
Current
Market
External
Technology
Base
Technology Insourcing
R
D
3
Open Innovation
Other firm´s
market
License, spin
out, divest
Our new
market
Internal
technology base
Internal/external
venture handling
External technology
insourcing
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
Our current
market
2003: We broke up the fortress …
Philips Research,Ronald Wolf, 10/08
Bringing in the right partners – Open innovation
> 75 companies and
> 7000 people at
High Tech Campus Eindhoven
Corporate
innovators
Research
institutes
Consultancy
& services
Economic
development
companies
Philips Research,Ronald Wolf, 10/08
6
The expansion of the corporate funnel
Insourced
Ideas /Technology
ODM
Spin in
Start ups
IP insourcing
OEM
Acquisitions
Incubators
Spin out
Alliances
Front – end
IP Licensing
Development
Philips Research,Ronald Wolf, 10/08
Commercialization
BP’s challenge in February 2006
• Energy Bioscience looked promising (Senior Executive buy-in)
• How do we meld commercial/technology strength with
biology/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 a
rapidly 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, and
commercialization of research results
8
Funding for Open and Proprietary Components
c
UC Berkeley
Host Institution
s
act
r
t
on
$35M/yr
$50M/yr
con
tra
cts
BP
Proprietary Component
contracts
subcontracts
Lawrence Berkeley
National Laboratory
subcontracts
University of Illinois
Urbana-Champaign
ENERGY BIOSCIENCES INSTITUTE (EBI)
OPEN RESEARCH
Other
BP Components
$15M/yr
contracts
Other
Entities
BP R&T
PROPRIETARY RESEARCH
9
Licensing provisions
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 pursue
commercialization
- BP will underwrite the patent
costs
EXCLUSIVE
BP may obtain exclusive license
rights to sole or joint inventions.
- pre-negotiated capped fees
- “Bonanza clause” in case of
extraordinary commercial success
10
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
© 2008 Henry Chesbrough
11
P&G’s Stock Price: 8/1998-3/2000
P&G Stock Price
130
120
110
P ric e p e r s h a re
100
90
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40
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© 2008 Henry Chesbrough
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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
© 2008 Henry Chesbrough
13
Example: Proctor & Gamble
A.G. Lafley
President and CEO
P&G
“We will acquire 50% of our
innovations from outside P&G”
Jeff Weedman
28 External Business Development managers
Nabil Y. Sakkad
SVP, R&D, Global Fabric & Home Care
VP, External Business Development
“We don’t care where good ideas come from.”
“There’s 1.5 Million people in the world who
know about my business. I want them on my
team”
Larry Huston (just retired)
120 Technology Entrepreneurs
VP, Knowledge & Innovation, Corporate R&D
| 14
P&G Share Price Restored!
| 15
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
© 2008 Henry Chesbrough
16
Not Just for High Tech:
Procter & Gamble
Other Firm’s
Market
“Use it or Lose it”
New
Market
Internal
Technology
Base
External
Technology
Base
Technology
Scouts
R
Current
Market
Venture
Acquisitions
“Spinbrush”
D
Large
Acquisitions
“Gillette”
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An Iberian Example: El Bulli
• Ferran Adria studies molecular gastronomy, working
with 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 department
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
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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
© 2008 Henry Chesbrough
20
Advantages of Small
Companies
• Size: markets that are too small for large firms
can be attractive
• Focus: greater ability to execute for a specific
segment or set of customer needs
• Specialization: ability to develop deep
knowledge of a specific domain
• Entrepreneurial: external focus on results,
much less internal “politics”
• Speed: faster decisions, faster execution, faster
results
© 2008 Henry Chesbrough
21
Open Innovation Benefits for
SMEs
• Large firms increasingly value collaborative
partnerships
• Large firms create platforms that seek
supporting investments from SMEs
• Users (customers) initiate more innovative
activity, a big opportunity for SMEs
• SMEs can expand geographically now at lower
cost, “hidden champions”
• Greater rewards to specialization in Open
Innovation
© 2008 Henry Chesbrough
22
large
small
Scale of R&D
Where does your business fit?
Specialist
Dominant
Niche
Breakout
small
© 2008 Henry Chesbrough
large
Market Size
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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
© 2008 Henry Chesbrough
24
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 your
IP
– You invest, others benefit
• What if niche grows too large?
© 2008 Henry Chesbrough
25
Winning in the Breakout Business
• Here, small R&D investments generate
surprisingly 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
© 2008 Henry Chesbrough
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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
© 2008 Henry Chesbrough
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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 businesses
into companies that can execute them better
© 2008 Henry Chesbrough
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Risks of Specialists
•
•
•
•
Obsolescence
Departing employees
Management Changes at Key Customers
Market Shift Away from the Specialty
– Travel agencies after the Internet
© 2008 Henry Chesbrough
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Winning in Dominant
Businesses
• The Land of the Giants: High R&D costs, large
markets
• Many niche opportunities to complement
Dominant businesses for SMEs
• Speeding up Dominant Business’s time to
market
• Partnering with Large Business: “Only way to
become a big company is to learn how to work
with big companies” - Intel
© 2008 Henry Chesbrough
30
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 work
effectively with small companies
© 2008 Henry Chesbrough
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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?
© 2008 Henry Chesbrough
32
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)
sustainability
patents
• greentech / sustainability patents
represent a small portion of the overall
portfolio of the average company.
• and most companies have little skill or
experience in licensing or sharing them
Businesses Control the Use of Their Green IP
• retain the essential rights inside the
core business
• use a standard offer to license the
rights via automated transactions
• determine exceptions to licensing
requirements
– research
– geography
– field of use
– etc….
The Business Benefits of Sharing or
Exchanging 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 IP
rights
– 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 available
green technologies, whether private or
publicly held
• Offer financial assistance for licensing useful
Green 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, Ryan
Air/ezreenphotography, Ryan Air New Boeing 787
Colours/macrodebs, 332/265/Digg Pirate, The bus
shelter at the edge of the ocean/goddess_spiral, Flickr
treo ad/Steve Rhodes, Technology - "Future
Vision“/$ydney
iStockphoto: 000003004014, 000003062424, 000004293861,
000007135639, 000005589058, 000000718722
iPod photo: http://www.apple.com/ipodclassic/
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