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Open innovation slides

  1. 1. © 2007 Henry Chesbrough<br />1<br />Open Innovation: The Next Frontier in R&D<br />Presentation to ALA 2008<br />Henry Chesbrough<br />Executive Director, Center for Open Innovation<br />Haas School of Business<br />UC Berkeley<br />
  2. 2. © 2007 Henry Chesbrough<br />2<br />The Current Paradigm: A Closed Innovation System<br />Science<br />&<br />Technology<br />Base<br />The<br />Market<br />Research<br />Investigations<br />Development<br />New Products<br /> & Services<br />R<br />D&E<br />
  3. 3. © 2007 Henry Chesbrough<br />3<br />Great Successes from the Closed Innovation Model<br /><ul><li>The Chemicals Industry – Germany and later US
  4. 4. Edison, GE, and the rise of electrification
  5. 5. Rockefeller and Standard Oil
  6. 6. World War II scientific achievements
  7. 7. Chandler: Internal R&D key to the rise of the modern US corporation in 20th century</li></li></ul><li>© 2007 Henry Chesbrough<br />4<br />Rising Costs of R&D<br />Then (25 years ago)<br /><$ 30 million for a fab<br /><$ 50 million for a new drug<br />< $ 10 million for a new consumer product<br />Now<br />> $ 3 billion for a fab<br />> $ 800 million for a new drug<br />> $50 million for a new consumer product<br />
  8. 8. © 2007 Henry Chesbrough<br />5<br />Shorter Shipping Lives<br />Disk drives<br />Cell phones<br />Generic drugs<br />“80% of the senior executives we surveyed indicated that the productive lives of their strategies were getting shorter.”<br />Chris Zook, HBR April 2007<br />
  9. 9. © 2007 Henry Chesbrough<br />6<br />Diminishing Economies of Scale:<br />US Industrial R&D <br />by Size of Enterprise<br />Company Size 1981 1989 1999 2003<br />< 1000 employees 4.4 % 9.2% 22.5% 22.5%<br />1,000 – 4,999 6.1 % 7.6 % 13.6% 14.8%<br />5,000 – 9,999 5.8 % 5.5% 9.0% 7.5%<br />10,000 – 24,999 13.1% 10.0% 13.6% 13.4%<br />25,000 + 70.7% 67.7% 41.3% 40.9%<br />Sources: National Science Foundation, Science Resource Studies, Survey of Industrial Research Development, 1991, 1999, 2001, 2003.<br />
  10. 10. © 2007 Henry Chesbrough<br />7<br />What changed? Five Erosion Factors<br />Increasingly mobile trained workers<br /> More capable Universities<br /> Diminished US hegemony<br /> Erosion of oligopoly market positions<br /> Enormous increase in Venture Capital<br />
  11. 11. © 2007 Henry Chesbrough<br />8<br />Hidden Assumptions in the Internally-Focused Innovation System<br />If I discover it, I will find a market for it.<br />If I discover it first, I will own it.<br />The important technologies I will need can be anticipated in advance.<br />“Misfits” are regrettable, but are a cost of doing business.<br />The best people in this field work for us.<br />
  12. 12. © 2007 Henry Chesbrough<br />9<br />Type I and Type II: Xerox and PARC<br /><ul><li>Designed to minimize “false positive” errors
  13. 13. Ignores risk of “false negative” errors</li></li></ul><li>© 2007 Henry Chesbrough<br />10<br />A Classic Example: the Xerox 914 copier<br />Chester Carlson develops electrostatic method to place toner on paper, a “dry” process for copying documents<br />In 1955, existing processes (wet or thermal) used to make 15-20 copies per day. Machines cost ~ $300.<br />Joe Wilson estimates cost of building dry process copiers at ~$2000<br />Wilson seeks manufacturing and distribution partners<br />IBM, Kodak, GE<br />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.”<br />
  14. 14. © 2007 Henry Chesbrough<br />11<br />Wilson’s Business Model<br />ADL’s study (and the other companies) viewed the dry process technology through a traditional business model<br />charge for the equipment (dry technology very high cost)<br />charge for the supplies as needed (no savings vs. wet)<br />Joe Wilson ignored these rejections, and took the technology to market through a new Business Model<br />$95/ month for first 2000 copies, 4 cents each for additional<br />Low barrier for customer trial, Haloid/Xerox bore the risk<br />Enormous usage: 2000 copies per day<br />Revenues grow 41% compounded for next 20 years<br />
  15. 15. © 2007 Henry Chesbrough<br />12<br />3Com<br />Metcalfe left PARC in Jan. 1979<br />Did consulting work until Feb. of 1981<br />DEC, GE, Exxon<br />Brokered alliance between Xerox, DEC, and Intel for IEEE 802 (aka Ethernet)<br />Initial plan: sell to Unix workstations, via direct sales force<br />
  16. 16. © 2007 Henry Chesbrough<br />13<br />Then….<br />As part of consulting, created directory of LAN dealers and VARs across US<br />first of its kind<br />sold many hundreds of copies at $125 each<br />did this for 5 years<br />IBM PC took the world by storm<br />3Com formed, Krause joined from HP<br />VCs financed: <br />New plan: add-on boards for IBM PCs, sold through IBM retailers and VARs<br />
  17. 17. © 2007 Henry Chesbrough<br />14<br />Different Financial Processes<br />Chess: Type I errors<br />Plan several moves ahead<br />No new information needed<br />You know what you’ve got, what opponent has<br />NPV<br />Poker: Type II errors<br /><ul><li>Pay to play
  18. 18. Pay for new information
  19. 19. You discover what you’ve got, what other players have
  20. 20. Options</li></li></ul><li>© 2007 Henry Chesbrough<br />15<br />
  21. 21. © 2007 Henry Chesbrough<br />16<br />The Open Innovation Paradigm<br />Other Firm’s <br />Market<br />Licensing<br />Internal<br />Technology<br />Base<br />Technology Spin-offs<br />New <br />Market<br />Current<br />Market<br />External<br />Technology<br />Base<br />Technology Insourcing<br />R<br />D<br />
  22. 22. 17C 2002 Henry Chesbrough EIRMA SIG III, 2005-10-20<br /> Open innovation<br />Licence, spin out, divest<br />Internal technology base<br />Internal/external venture handling<br />External technology insourcing <br />External technology base <br />Closed innovation<br />Other firm´s market<br />Our new market<br />Our current market<br />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<br />
  23. 23. © 2007 Henry Chesbrough<br />18<br />The Division of Innovation Labor<br />Open Innovation separates innovation into multiple stages<br />From a marathon to a relay race<br />Lab and Test Equipment are Fundamental to this division of labor<br />Customer’s ability to verify that spec was met<br />Supplier’s confidence that good product was delivered<br />Enables the innovation baton to be passed efficiently and effectively<br />
  24. 24. © 2007 Henry Chesbrough<br />19<br />IBM: Its Closed Value Chain<br />All IBM – pre 1993<br />
  25. 25. © 2007 Henry Chesbrough<br />20<br />IBM’s Open Business Model<br />
  26. 26. © 2007 Henry Chesbrough<br />21<br />IBM’s Open Source Business Model<br />Spends about $100M each year on Linux<br />50% for general improvement<br />50% for specific improvements for IBM gear<br />Others spend another $800M a year <br />IBM creates value through Linux<br />Also donates development tools, patents<br />IBM captures value through value-added services and software “up the stack”<br />
  27. 27. © 2007 Henry Chesbrough<br />22<br />Procter & Gamble<br />P&G used to be a VERY closed organization<br />“We invented Not Invented Here” – J. Weedman<br />P&G financial crisis, in 2000<br />Missed a series of quarterly financial estimates<br />Stock market lost confidence in the company<br />Stock price fell by more than half in 4 months!<br />CEO (Jagr) was fired<br />
  28. 28. © 2007 Henry Chesbrough<br />23<br />P&G’s Stock Price: 8/1998-3/2000<br />
  29. 29. © 2007 Henry Chesbrough<br />24<br />Searching for the Root Cause<br />“We fundamentally had a growth problem. Our current brands were performing well. But we weren’t developing many new brands.” – C. Wynett<br />To get new brands, P&G needed to open up.<br />Connect and Develop<br />SpinBrush, Swiffer, Regenerist<br />
  30. 30. © 2007 Henry Chesbrough<br />25<br />The New P&G<br />Many processes to enable open innovation<br />Technology scouts<br />Legal templates for IP, partnering<br />Investments in Innovation Intermediaries<br />The Goal Now: Become the open innovation partner of choice<br />
  31. 31. © 2007 Henry Chesbrough<br />26<br />Balancing Internal and External R&D Funding: P&G<br />100<br /> Westinghouse<br />% from<br />External<br /> Raytheon<br />P&G<br />2002<br /> TI<br /> Nokia<br />0<br /> Hitachi<br />100<br />% from internal<br />0<br />Source: Gassmann, v. Zedtwicz (2002)<br />
  32. 32. © 2007 Henry Chesbrough<br />27<br />Balancing Internal and External R&D Funding: P&G<br />100<br /> Westinghouse<br />P&G<br />% from<br />External<br /> Raytheon<br />2007<br />2002<br /> TI<br /> Nokia<br />0<br /> Hitachi<br />100<br />% from internal<br />0<br />Source: Gassmann, v. Zedtwicz (2002)<br />
  33. 33. © 2007 Henry Chesbrough<br />28<br />Finding Partners: A Massive Filtering Problem<br />The Unwashed<br />The Suspects<br />The Prospects<br />The <br />Finalists<br />The Partner(s)<br />
  34. 34. © 2007 Henry Chesbrough<br />29<br />IP Management Innovations<br />Scouting technologies (utilizing public domain information)<br />Two Innovative Intermediaries: Nine Sigma and<br />Outbound email “RFPs”/ Contacts and Competencies<br />Requires (public) Problem Statement from Client<br />A problem well-defined is half-solved<br />Establishes context for potential solutions<br />Must not “tip your hand” to competitors<br />
  35. 35. © 2007 Henry Chesbrough<br />30<br />How can one identify promising sources of innovation (without contamination)?<br />Another innovative Intermediary: InnoCentive<br />Start with public domain Problem Statement<br />Solver Agreement (Solver owns solution being proposed)<br />Private “rooms” on site for Solver to propose solution<br />InnoCentive staff validates potential of idea prior to sharing idea with Client<br />Client pays only for valid solution<br />
  36. 36. © 2007 Henry Chesbrough<br />31<br />Other Innovative IP Intermediaries<br />Inbound<br />Innovation Exchange<br />SSIPEX<br /><br />Outbound<br />IpValue, ThinkFire (patents)<br />Utek, Flintbox (university technology)<br />New Venture Partners, LLC (spinoffs)<br />
  37. 37. © 2007 Henry Chesbrough<br />32<br />Intermediaries & Open Innovation<br />Other Firm’s <br />Market<br />IP Value, Yet2 - licensing<br />NVPLLC: spinoffs<br />Internal<br />Technology<br />Base<br />New <br />Market<br />Current<br />Market<br />External<br />Technology<br />Base<br />Investment<br />Banks<br />Sequoia/<br />Cisco<br />InnoCentive<br />NineSigma<br /><br />Technology Insourcing<br />R<br />D<br />
  38. 38. © 2007 Henry Chesbrough<br />33<br />The Logic of “Open Innovation”<br />Good ideas are widely distributed today. No one has a monopoly on useful knowledge anymore.<br />Financial managers must play poker, as well as chess, to capture the value in false negatives.<br />We must manage IP in order to manage research: <br />need to access external IP to fuel our business model<br />need to profit from our own IP in others’ business model  <br />Not all of the smart people in the world work for us.<br />
  39. 39. © 2007 Henry Chesbrough<br />34<br />A New Perspective Towards R&D<br />R.I.P<br />R.I.P<br />2007<br />Not Invented Here<br />Proudly Found<br />Elsewhere!<br />And verified by Lab <br />and Test Equipment!<br />
  40. 40. 35<br />