Open Innovation Seminar 2008 - Brazil - Henry Chesbrough

June 16, 2008 – São Paulo/SP Henry Chesbrough Center for Open Innovation – UC Berkeley Palestra Open Innovation and Open Business Models Open Innovation Seminar 2008 – Allagi Inovação aberta - Brasil

Open Innovation and Open Business Models Open Innovation Seminar 2008 World Trade Center, Sao Paulo, Brazil Henry Chesbrough Executive Director Center for Open Innovation © 2008 Henry Chesbrough UC Berkeley 2

Where Were the Great Ideas for Innovation 50 or 100 years ago? • Individual Inventors • A few very large companies’ R&D labs • “The key [to success] is to find a man of genius, give him money, and leave him alone.” – James Conant, former President, Harvard Univ. © 2008 Henry Chesbrough 3

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. © 2008 Henry Chesbrough 5

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 © 2008 Henry Chesbrough 7

Where are the Great Ideas today? • Individual Inventors • SMEs • Universities and Research Institutes • Some large companies • “Not all the smart people in the world work for you.” – Bill Joy, founder, Sun Microsystems, now Partner at Kleiner Perkins. © 2008 Henry Chesbrough 8

The Open Innovation Paradigm Other Firm’s Licensing Market Technology Spin-offs Internal New Market Technology Base Current External Market Technology Base Technology Insourcing © 2008 Henry Chesbrough R D 9

Closed innovation Open Other firm´s market Licence, spin Our new out, divest market Internal technology base Internal/external Our current venture handling market 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 10 C 2002 Henry Chesbrough EIRMA SIG III, 2005-10-20

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 12

Price per share 9/1 7/ 1 100 110 120 130 40 50 60 70 80 90 10 998 /1/ 10 199 /15 8 / 10 199 /29 8 / 11 199 /12 8 /19 11 98 /26 / 12 199 /10 8 / 12 199 /24 8 © 2008 Henry Chesbrough /19 1/7 98 /1 1/2 999 1/ 19 99 2/4 /1 99 2/1 9 8/ 19 99 3/4 /1 3/1 999 8/ 19 99 4/1 /1 4/1 999 5/ 19 4/2 99 9/ 19 5/1 99 3/ 19 5/2 99 7/ 19 6/1 99 0/ 19 6/2 99 4/ 19 99 7/8 /1 99 9 P&G Stock Price 7/2 2/ 19 99 8/5 /1 8/1 999 9/ 19 99 9/2 /1 9/1 999 6/ 1 9/3 999 0/ 10 199 /14 9 / 10 199 /28 9 / 11 199 /11 9 / 11 199 /25 9 /19 12 9 /9/ 9 12 199 /23 9 /19 1/6 99 /2 1/2 000 0/ 20 00 2/3 /2 P&G’s Stock Price: 8/1998-3/2000 2/1 000 7/ 20 00 3/2 /2 3/1 000 13 6/ 2 3/3 000 0/ 20 00

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 14

Example: Proctor & Gamble A.G. Lafley President and CEO P&G “We will acquire 50% of our innovations from outside P&G” Jeff Weedman Nabil Y. Sakkad 28 External Business Development managers SVP, R&D, Global Fabric & Home Care VP, External Business Development “There’s 1.5 Million people in the world who “We don’t care where good ideas come from.” know about my business. I want them on my team” Larry Huston (just retired) 120 Technology Entrepreneurs VP, Knowledge & Innovation, Corporate R&D | 15

P&G Share Price Restored! | 16

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 17

Balancing Internal and External R&D Funding: P&G 100  Westinghouse % from  Raytheon External  TI P&G 2002  Nokia 0  Hitachi 0 % from internal 100 Source: Gassmann, v. Zedtwicz (2002) © 2008 Henry Chesbrough 18

Balancing Internal and External R&D Funding: P&G 100  Westinghouse P&G % from  Raytheon External 2007  TI 2002  Nokia 0  Hitachi 0 % from internal 100 Source: Gassmann, v. Zedtwicz (2002) © 2008 Henry Chesbrough 19

Open Innovation examples in Latin and South America Biocancer (Br) Provides drug development and clinical trial services to international pharmaceutical companies, mostly from the USA TVEI (Br) A company founded by local media industry experts, offers multi-platform sport-related interactive content to consumers and advertising services to businesses. Movix (Ch) Technologies for mobile operators developed by former employee of a large telco, the main product was licensed exclusively to a(nother) telco Akikb (Ch) Self-storage solution, not available in Chile at the time, based on a widespread model from the USA and leveraging the infrastructure of an established “sister” construction company Alltournative (Mx) Ecotourism and recreational experiences with the support and collaboration of local Mayan communities Interfactura (Mx) Billing software and services initially developed for a large firm and integrated to its network of suppliers Source: Dr. Jaime Garcia Alba, IADB

Case Studies’ Innovation Sources Biocancer TVEI Movix Akikb Alltournativ Interfactura e Product/Proce Innovation Process Service Product Service Process ss Networking Global Value Global Value Company Intra-industry Intra-industry Transplant Patterns Chain chain Value Chain Personal, Internal Sister Internal Financing self self Customer company Company company Intellectual Assets Not Important Important Not Important Not Important Not Important Not important Source: Dr. Jaime Garcia Alba, IADB

Case Studies Key Success Factors (KSFs)  Initial Customers: Most start with very few clients, typically large firms  Prior Experience: A number of entrepreneurs have an international background (prior US experience)  Business Focus: Most offer services rather than products  Source of Capital: Personal/Family sources initially, followed only later by bank and PE/VC  IP Protection: Not a KSF. Limited use of intellectual property protection mechanisms Source: Dr. Jaime Garcia Alba, IADB

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 23

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 24

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 25

Job #1: Strengthening the Current Business Research Development Internal Current Research Market and projects Business Model Product/ Technology Venture acquisition investing Technology External research In-licensing project © 2007 Henry Chesbrough 26

Job #2: Finding and Growing the New Business Research Development License & JV Other firm’s Market and Business Model Venture & New Acquisition Market and Business Model for your firm Research Current projects Market and Business Model for your firm Venture © 2007 Henry Chesbrough investing 27 External research

Issues for Open Innovation • Where will the basic science come from? • Will stronger Intellectual Property help or hurt the greater inflow and outflow of ideas? • Will companies accept external ideas as willingly as internal ideas? • Will companies allow internal ideas to flow outside to other businesses? • How can companies manage Open Innovation? © 2007 Henry Chesbroug 28

Issues for Open Innovation in Brazil • Can Universities and Research Institutes rise to the challenge of working more effectively with industry? • Can SMEs obtain the necessary financial and human capital to innovate and grow? • Are Intellectual Property laws and enforcement sufficient for Open Innovation? • Will large companies collaborate, or exploit? © 2007 Henry Chesbrough 29

Sustaining Innovation Capabilities: What You Innovate and How You Innovate Business Challenge: New Challenge: What You Innovate Model Innovation Ways to Create and Ecosystem Design, Capture Value Growth and Sustenance Changin g the What Focus of Challenge: Traditional Becoming an Product Product Changing Innovation Partner and Service Development the How of Choice Innovation Systems “Closed” “Open” How You Innovate | 30

Graphic Illustration of a Generic Airline Business Model Passengers Revenue Air Travel Costs Food Airport Aircraft, Fuel Cleaning Runway Check-in Jetway | 31

Ryan Air • Ryan Air is a regional low-fare airline operating in the United Kingdom and northern Europe. • Only flies into regional airports, no landing fees. • Guarantees airport certain # passengers in their terminal • Airport pays Ryan Air to operate out of its airport • Airport provides Ryan Air a percentage of the revenues from shops, restaurants, car hire and hotels at airport. © 2007 Henry Chesbrough 32

The Ryan Air Business Model Passengers Air Travel Revenue Cost Airport Food Car Hire Hotels Aircraft, Fuel Shopping & Food Parking X Jetway X Check-in X XX Cleaning | 33

Business Model Maturity Stages 6 stages 1. Undifferentiated business model 2. Differentiated business model 3. Segmented business model 4. Externally aware business model 5. Integrated business model 6. Platform leadership business model © 2007 Henry Chesbrough 34

Adopting Darwin’s Perspective • “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” • By analogy, it is not the strongest or best informed business model that prevails. © 2007 Henry Chesbrough 35

The Business Model Innovation Gap • Who is responsible (budget and authority) for business model innovation at your company? • What processes are in place to experiment with alternative business model possibilities? • How do resources for business model innovation compare to resources for technical innovation? © 2007 Henry Chesbrough 36

What is Innovation? Before After • Invention • Commercialization • Product • Business, including process and biz model • Technology-driven • Business/value-driven • Internally generated • Internal Integration of • Engineering’s job int. and ext. stuff • Everyone’s job © 2007 Henry Chesbrough 38

Open Innovation Seminar 2008 - Brazil - Henry Chesbrough

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