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

The Market

Research Investigations

Development New Products /Services

D
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The Open Innovation Paradigm

Licensing
Other Firms Market

Internal Technology Base External Technology Base

Technology Spin-offs

New Market

Current Market

Technology Insourcing
R D
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Open Innovation
Other firms market

License, spin out, divest Internal technology base

Our new market

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

The expansion of the corporate funnel

Insourced Ideas /Technology

ODM

Spin in Start ups IP insourcing

OEM

Acquisitions

Incubators Alliances IP Licensing

Spin out

Front end

Development
Philips Research,Ronald Wolf, 10/08

Commercialization

BPs 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 cant 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
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Funding for Open and Proprietary Components

c
UC Berkeley Host Institution
subcontracts

ts trac on

$50M/yr con tra cts

BP Proprietary Component
contracts

$35M/yr

Lawrence Berkeley National Laboratory

subcontracts

Other BP Components

contracts

University of Illinois Urbana-Champaign

ENERGY BIOSCIENCES INSTITUTE (EBI) OPEN RESEARCH

$15M/yr

Other Entities

BP R&T PROPRIETARY RESEARCH

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

NON-EXCLUSIVE Non-exclusive, royal free (NERF) license in BPs 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

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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
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2008 Henry Chesbrough

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

P&G Stock Price
130

120

110

100
P ric e p e r s h a re

90

80

70

60

50

40
9 9 9 9 9 9 9 0 0 0 8 8 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 8 8 8 8 8 8 9 9 9 9 9 99 9 9 99 9 9 99 99 9 9 99 99 99 99 99 99 9 9 99 99 99 99 99 99 99 99 99 99 99 9 9 99 9 9 99 99 9 9 99 99 9 9 00 00 0 0 00 00 0 0 00 / 1 /1 / 1 5 / 1 9 /1 2 / 1 6 /1 0 /1 4 / 1 / 7 / 1 1 / 1 /4 /1 8 / 1 / 4 / 1 8 / 1 / 1 / 1 5 / 1 9 / 1 3 / 1 7 / 1 0 / 1 4 / 1 / 8 /1 2 / 1 / 5 / 1 9 / 1 /2 /1 6 / 1 0 / 1 4 / 1 8 /1 1 /1 5 / 1 / 9 / 1 3 /1 /6 /2 0 / 2 / 3 /2 7 / 2 / 2 / 2 6 / 2 0 / 2 7 2 2 / 1 3 3 /1 3 / 3 9 /1 1 0 1 0 / 1 1 0 /2 1 1 / 1 1 1 / 2 1 2 /1 1 2 / 2 1 1 /2 2 2 / 1 3 3 /1 4 4 /1 4 / 2 5 / 1 5 /2 6 / 1 6 / 2 7 7 / 2 8 8 /1 9 9 / 1 9 /3 1 0 / 1 1 0 / 2 1 1 /1 1 1 / 2 1 2 1 2 /2 1 1 / 2

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Searching for the Root Cause

We fundamentally had a growth problem. Our current brands were performing well. But we werent 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

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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

VP, External Business Development

Nabil Y. Sakkad
SVP, R&D, Global Fabric & Home Care

We dont care where good ideas come from.

Theres 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

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P&G Share Price Restored!

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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

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Not Just for High Tech: Procter & Gamble

Use it or Lose it Internal Technology Base External Technology Base
Technology Scouts R

Other Firms Market

New Market

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
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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
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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
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Where does your business fit?

large

Scale of R&D

Specialist

Dominant

small

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 dont overinvest, right-size the investment

Move fast
Develop new products to keep others out
Or at least behind
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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?

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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 promos) A key skill: thinking like an architect, or a systems integrator
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Risks in the Breakout Business

Many businesses dont scale up well Large competitors jump in Partners become competitors Systems integrator loses control of the platform

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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
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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

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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 Businesss time to market Partnering with Large Business: Only way to become a big company is to learn how to work with big companies - Intel
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Risks in Dominant Businesses

Getting squeezed by your customer Sustaining collaboration over time Being acquired by the Dominant partner
spin ins How to value fairly such spin-ins?

Large firm may lack processes to work effectively with small companies
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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 businesss fit? Can groups of SMEs organize to create breakout businesses?
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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 theres 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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