Open Innovation: The New Imperative for Creating
and Profiting from Technology
by Henry Chesbrough,
Foreward, John Seely Brown
April 25, 2003; hardcover; $35.00; ISBN: 1578518377
Interview with the Author
About the Book
The days of hoarding technology are over. They have gone by the wayside, as the dominion of powerful R & D departments housed in nearly every major corporation is giving way to a more distributed, diffused knowledge environment. The simple truth is that no company has a monopoly on great people and great ideas anymore. Relying solely on one’s own knowledge today takes too much money and too much time to get to market, while the best path to market for a company’s internal discovery may be through another company’s business. But if this old model of innovation, which served as the engine for progress and change in American business for nearly a century, has become obsolete, what will replace it?
A new paradigm called “open innovation” says Henry Chesbrough, former Silicon Valley executive and author of a new book by the same title. OPEN INNOVATION: The New Imperative for Creating and Profiting from Technology. In it, Chesbrough takes a close look at the process of innovation, revealing how today’s fast-changing environment is creating a new way of bringing good ideas to market.
“In today’s world, where the only constant is change,” writes Chesbrough, “the task of managing innovation is vital for companies of every size in every industry. Innovation is vital to sustain and advance companies’ current businesses; it is critical to growing new businesses. It is also a very difficult process to manage.”
Where Will We Get Our Ideas?
Ideas that once germinated in large companies are now growing in a variety of settings – from the small, high tech start up in Silicon Valley to the research facilities of academic institutions, to spin-offs from large, established firms. This is at the center of the shift. Instead of looking exclusively to one’s own researchers, companies must now learn to embrace the breadth of knowledge that is available from variegated pools of knowledge that are scattered across the landscape. In short, OPEN INNOVATION means that valuable ideas can come from inside or outside the company and can go to market from inside or outside the company as well. This approach places external ideas and external paths to market on the same level of importance as that reserved for internal ideas and paths to market during the Closed Innovation era.
Here is how the two methods compare:
Most of the smart people work elsewhere
Many external ideas in play
High labor mobility
Active VC funding
Numerous start ups
Examples of industries: PCs, film
Most of the smart people work for us
Largely internal ideas in play
Low labor mobility
Little VC funding
Few, weak start ups
Examples of industries: nuclear
reactors, mainframe computers
Using real life examples from companies like Xerox, Procter & Gamble, IBM, Lucent, Intel, Merck, and Millennium, the book shows how companies can use their methods to maximize the efforts of their R & D departments, better manage and access intellectual property and grow their business.
What Made it Happen?
A general erosion of the knowledge monopolies that existed inside the elite corporate R&D labs, which occurred on many fronts, is responsible for this shift, according to Chesbrough . They are:
- A highly mobile, highly experienced and skilled workforce. As people became able and willing to travel to jobs, their knowledge moved with them and the body of knowledge became spread over a larger landscape.
- An increased amount of college and post-college training by the workforce. As more people became more educated, knowledge began to move between academic sources and corporate ones on a much larger scale.
- The growing presence, particularly in the last two decades, of private venture capital funds that focused on start up companies which specialized in new technology. Innovations from these highly capable start-ups became formidable competitors for the large, established firms that had formerly financed most of the R&D in the industry.
- The combination of an increasingly fast time to market for new products and services along with an increasingly knowledgeable customer base, made it more difficult for large companies to move quickly enough to make their ideas profitable. Often, these big companies were beaten to market by smaller, more agile firms.
- Companies from outside the United States became more viable and effective competitors.
The new paradigm of OPEN INNOVATION will exploit the diffusion of knowledge that has come from the factors listed above. Instead of making money by restricting your technology to your own use, you make money by leveraging multiple paths to market – perhaps by selling the idea to a firm better suited to develop your knowledge. And you make more money by leveraging the ideas of others in your own business.
Open Innovation in the Real World
The concept of OPEN INNOVATION is making its way into the real world over time, in both high-tech and lower-tech industries. In Procter & Gamble, for example, a new position has been created called the Director of External Innovation. P&G estimates that about 10% of the ideas in its pipeline came from outside. They have a corporate initiative to boost that to 50% in five years. Another example of the new mindset comes from the pharmaceutical giant Merck. The company has now charged its scientists with creating a virtual lab in their R & D space. Their job is not only to create their own science, but to identify and build connections to other excellent science in other labs, where ever they may be. The head of Merck’s R & D department describes it like this. “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 30 people in our lab, but the 3,000 people, say, in the world working in that field.”
In his foreword to the book, John Seely Brown, Director Emeritus, Xerox Palo Alto Research Center (PARC) writes, “Let us be wary of the old, conservative, but still very powerful wisdom that can always find reasons or examples from the past to prove that any particular innovation is foodhardy. Let us all, instead, engage in the vitally important work of innovating innovation.” OPEN INNOVATION provides a road map to the real world ahead for large and small companies working to do just this.
Henry Chesbrough is an Assistant Professor and the Class of 1961 Fellow at Harvard Business School. He worked for many years in Silicon Valley, including a 7 year stint at Quantum where he worked in disk drive development. He and his wife and two daughters divide their time between Boston and the Bay Area of California.