Silverthorne: What's the one take-away you would like your business reader to walk away with from the book, Open Innovation: The New Imperative for Creating and Profiting from Technology?
Chesbrough: Innovation used to be managed in a closed, internally focused manner. Innovation today must be managed as an open system, with a far greater external focus.
Q: Which companies today are the best examples of open innovation, and why?
A: IBM, Intel, and Procter & Gamble all search externally for useful ideas to leverage their business. IBM invests significant resources in software such as Java and Linux that IBM does not own in order to integrate many companies' products and services for IBM's customers. Intel invests significant resources in university research (which it does not own) and in start-ups (as a venture capitalist), to fuel its own business. P&G has set a stretch goal of having 50 percent of its new project portfolio come from outside its own four walls. And IBM and P&G also allow others to license their ideas for their own business. IBM reported royalty receipts of $1.9 billion in 2001, which was 15 percent of its operating income, while P&G has a policy of licensing any patented technology not in use in one of its own businesses within three years.
Q: What are the benefits for a business actively following an open innovation paradigm?
A: There are direct and indirect benefits. Direct benefits include higher growth for one's own business, through incorporating additional ideas into the business. Another benefit is higher profits from one's ideas, through licensing and spin-off ventures that turn underused technology into additional royalties and equity. Indirect benefits come from injecting competition into one's own innovation system. Internal researchers must compete with external sources to meet the demands of the business, and business units must compete with outsiders to make use of available technologies. The net result of this competition is faster transfer of technologies and more rapid learning from internal and external use of those technologies.
Q: In days gone by, the great R&D labs were affordable only to the largest companies. Can smaller companies use the concept of open innovation to boost their own R&D efforts without breaking the bank?
A: Yes. In fact, this is already happening. According to the National Science Foundation, in 1981 companies of less than 1,000 employees accounted for just over 4 percent of all R&D spending in the U.S., while companies of more than 25,000 employees supplied over 70 percent of spending in that year. By 1999, those small companies accounted for over 22 percent of all industrial R&D spending, while the largest companies' share of spending declined to just over 40 percent. These data reflect the changing reality in almost every industry: great technology and ideas can be found in companies of all sizes. Put differently, there appear to be fewer economies of scale in R&D than there used to be.
| The way companies define, measure, and reward excellent research has to change. |
| —Henry Chesbrough |
So what specific things are small companies doing to exploit open innovation? One thing they do is to recruit experienced scientists, engineers, and managers from large organizations. These people take their knowledge and experience with them into the small company. Another thing they do is to work closely with universities and one or more of their faculty. University research is quite good, and is highly accessible to companies of all sizes. In fact, small companies typically have less of a "not invented here" attitude, so they can absorb a good university project faster than a large company with such an attitude.
Q: How does a company get past the "not invented here" (closed innovation) syndrome?
A: The way companies define, measure, and reward excellent research has to change. Accessing a valuable external technology is a useful research activity. Companies today seldom reward this activity, though, in the same way that they would recognize someone who discovered a valuable technology on the inside. Some companies are converting internal researchers into external technology scouts, so that the external searching is being conducted by some of the same people who have worked inside within the labs. That also helps break down resistance.
Q: From an organizational standpoint, who should be responsible for an open innovation program? Does it call for the creation of a new executive-level position?
A: Yes and no. It certainly calls for a changed orientation for the chief technology officer. It might also elevate the importance of what I would call the "chief business officer," who manages the business model within the company, looking for additional ways to grow the current business and ways to identify and execute a new business for the company. Throughout the company, people should recognize that new innovations are hard to measure, such that "false positives" and "false negatives" can occur. While most companies screen their portfolio of projects to eliminate false positives, few have processes to identify and profit from false negatives in their company.
Book Excerpt: <em>Open Innovation</em><br>Beyond Knowledge Generation to Connection
by Henry Chesbrough
Open Innovation thinking changes the role of the research function. It expands the role of internal researchers to include not just knowledge generation, but also knowledge brokering. Previously, researchers simply added to the knowledge sitting in the silos. Today, they are also charged with moving knowledge into and out of the silos. In this new role, knowledge located from outside may be just as useful as knowledge created from within—and it should be similarly rewarded.
The additional role of identifying and accessing external knowledge, in addition to generating internal knowledge, changes the career paths of researchers inside R&D firms. While deep understanding remains valuable, its utility is multiplied when linked to and built on the investigations and achievements of others. With this Open Innovation approach to knowledge, research managers must evaluate researchers' performance in different ways. Managers may apply different paths of promotion and may give their researchers rotational assignments in areas that interact with external participants outside the company, such as business development.
One example of this new role comes from Merck, perhaps the leading pharmaceutical firm in the world in terms of doing its own research. Merck is well known for its commitment to significant internal scientific research and is proud of the research discoveries that its scientists have made in the twentieth century. But its 2000 annual report noted that "Merck accounts for about 1 percent of the biomedical research in the world. To tap into the remaining 99 percent, we must actively reach out to universities, research institutions, and companies worldwide to bring the best of technology and potential products into Merck. The cascade of knowledge flowing from biotechnology and the unraveling of the human genome—to name only two recent developments—is far too complex for any one company to handle alone." 8
Toward that end, Merck has now charged its internal scientists with a new task: to create a virtual lab in their research area. This means that Merck scientists don't just create excellent science in their own lab; rather, they identify and build connections to excellent science in other labs, wherever these labs may be. In the words of Merck's head of R&D, "Every senior scientist here running a project should think of herself or himself as being in charge of all the research in that field. Not just the 30 people working in our lab but the 3,000 people, say, in the world working in that field." 9
This is a case where the messenger is as important as the message. Few would dispute that Merck is among the most scientifically capable pharmaceutical firms in the world. When a firm with Merck's reputation for the excellence of its own science determines that it needs to connect deeply with the external knowledge base to be successful, other firms would do well to follow Merck's lead.
Reprinted by permission of Harvard Business School Press. Excerpt from Open Innovation: The New Imperative for Creating and Profiting from Technology. Copyright 2003 Henry Chesbrough; All rights reserved. To order, please call (800) 988-0886.
Footnotes
8. Stanford economist Nathan Rosenberg has an apt description of the challenge of envisioning the best use of a new technology: "There is often a gross failure to anticipate many of the eventual specific end uses of an innovation. A great deal of creative intelligence and social imagination is necessary to perceive new possibilities at that vague interface between new technical capabilities and social needs." Nathan Rosenberg, Inside the Black Box: Technology and Economics (Cambridge, England: Cambridge University Press, 1982), 185.
9. An ironic example of the difference between the intended use for an idea and its eventual use comes from Gordon Moore, the founding CEO of Intel. He reflected that, when IBM awarded Intel the design win for the Intel 8088 microprocessor for IBM's new PC, Intel did not regard the IBM computer design win as one of the top fifty market applications for the product. Yet today, most of Intel's revenue and practically all of its profits come from its Pentium microprocessors, which descended from the original IBM design win. See Gordon Moore, "Some Personal Perspectives on Research in the Semiconductor Industry," in Engines of Innovation: U.S. Industrial Research at the End of an Era, ed. Richard Rosenbloom and William Spencer (Boston: Harvard Business School Press, 1996).