Open Innovation The Key Elements Presentation to Goodyear

Open Innovation: The Key Elements Presentation to Goodyear Henry Chesbrough Haas School of Business UC Berkeley

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Open Innovation: Then and Now Then • In April of 2003, the term “open innovation” yielded ~200 Google pages, before I published the book Now • In April of 2013, a search on the same term yielded 483 million pages! – 6 orders of magnitude in 10 years

A Closed Innovation System Science & Technology Base Research Investigations R The Market Development New Products /Services D 4

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Where is R&D Performed? 7

What changed? Some Erosion Factors • Increasingly mobile trained workers • More capable Universities • Diminished US hegemony • Erosion of oligopoly market positions • Enormous increase in Venture Capital • Low cost, global communications networks 8

Merck’s Conclusion “Merck accounts for about 1% of the world’s biomedical research. To tap into the other 99%, we must actively reach out…. “The cascade of human knowledge flowing from biotechnology and the unraveling of the human genome… is far too complex for any one company to handle alone. ” 9

• “Not all the smart people work for you. ” – Bill Joy, founder of Sun, currently VC 10

The Open Innovation Paradigm Other Firm’s Market Licensing Technology Spin-offs Internal Technology Base New Market Current Market External Technology Base Technology Insourcing R D 11

Implications for Goodyear • What are the biggest innovations in the your market, over the past decade? • Where did they come from? – Large companies – Small companies – Startups/Individuals – Universities –? • Are you positioned to innovate the innovations of the next decade? 12

IBM & Open Innovation $1. 9 B licensing, OEM for semi co’s ODM for others Internal Technology Base External Technology Java, Base Linux R Global Svcs Sun, and others’ eqmt Technology Insourcing 13 D Other Firm’s Market New Market Current Market

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 14

P&G’s Stock Price: 8/1998 -3/2000 15

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 “We don’t care where good ideas come from. ” Nabil Y. Sakkad SVP, R&D, Global Fabric & Home Care “There’s 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 | 16

P&G Share Price Restored! | 17

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 18

2003: We broke up the fortress … Philips Research, Ronald Wolf, 10/08 19

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 20

The expansion of the corporate funnel Insourced Ideas /Technology ODM Spin in Start ups IP insourcing OEM Acquisitions Incubators Alliances Front – end IP Licensing Development Philips Research, Ronald Wolf, 10/08 Spin out Commercializa 21

What is Innovation? Before • Invention • Product • Technology-driven • Internally generated • Engineering’s job © 2010 Henry Chesbrough 22

What is Innovation? Before • Invention • Product After • Commercialization • Business, including process and biz model • Technology-driven • Business/value-driven • Internally generated • Internal Integration of int. and ext. stuff • Engineering’s job • Everyone’s job © 2010 Henry Chesbrough 23

Innovation in Products and Technologies = Innovation in Services 24

Porter’s Value Chain Source: Michael Porter, Competitive Advantage, 1985 25

A Services Value Web Customer Engagement Service Offering Cocreation Customer Experience Design Experience Points Elicit Tacit Knowledge Boundary of the Firm Surrounding Environment - Partners - Complementors - Investors - Third Parties 26

This is Not New Thinking • “What the customer buys and considers value is never a product. It is always utility – that is, what a product does for him. ” – Peter Drucker, Management: Tasks, Responsibilities, Practices • “People don't want to buy a quarterinch drill. They want a quarter-inch hole!” – Ted Levitt, Marketing Myopia 27

The Utilization Differential • Assume your car is driven 12, 000 miles/year • Assume your average speed is 30 mph • You are driving the vehicle for roughly 400 hours – There are 8, 760 hours in a year – Therefore, your utilization is about 4. 6% • If your transportation were a service, that untapped 95. 4% becomes a source of value – Share vehicle acquisition, operation, maintenance costs – A potential Economy of Scale 28

Diamler’s Car 2 Go Service • Carsharing program: www. car 2 go. com • Launched in Ulm, Germany in 2008; Austin, TX in 2010 • Ultra-convenient: no fixed station to pick up or drop off; no required return time • No upfront commitment: no security deposit, monthly fee, reservation cost 29

Amazon – Open Services Creates Economies of Scope • Amazon allows third party merchants its own tools to create Amazon web pages • Fulfillment by the third party • Billing and collection by Amazon • Creates consistent shopping experience for users • Increases “share of wallet” for Amazon, with no merchandising risk! • Makes Amazon. com a more attractive Internet destination for shopping for many items 30

Amazon Web Services – Open Services Creates Economies of Scale • Amazon hosts other companies’ web sites • Converts fixed server farms to variable costs for customers • Increases Amazon’s utilization of its servers • Lowers Amazon’s own costs as a result • Rapidly growing and profitable business for Amazon • Raises the bar for its competitors 31

Amazon’s Latest Move: Fan Fiction Co-Creation Platform 32

Netflix’s New Breakthrough Big Data Comes to Hollywood! (Amazon just ordered five shows too!) 33

The Journey to Open Innovation… • Open up internally, before opening up externally. “Water cannot flow through broken pipes. ” • Focus on changing the culture of NIH • Pilot structures to connect internally and (then) externally – – – Technology and service roadmaps -> shopping list Internal IT to ideate, crowdsource, feedback External scouting: personal and IT-based Intermediaries Back end experts in transactions and compliance • Celebrate early wins, embrace noble experiments • Stay lean and agile, until results justify further resources 34

Thank you! © 2010 Henry Chesbrough 35

Open Innovation Survey Results Survey question: Has your firm explicitly engaged and invested in open innovation? Open Innovation practice § 72 % of firms are practicing open innovation § 28 % of companies are not practicing open Innovation Preliminary results No Open Innovation practice

Open Innovation Survey Results Significant decrease level of management support for open innovation significant increase § In 71 % of companies, the level of management support for open innovation has been significantly increased and only decreased in 4 % of companies. § In 25 % of companies, the level of management support for open innovation did not changed.

Open Innovation Survey Results Significant decrease intensity of open innovation activities significant increase § In 82 % of companies, the intensity of open innovation activities has been significantly increased and only decreased in 3 % of companies. § 15 % of companies did not changed their overall intensity of open innovation activities. Preliminary results

Open Innovation Survey Results Concerned survey questions Have you completely abandoned open innovation? Not abandoned Did abandoned § Not even a single company did abandoned open innovation Preliminary results

Open Innovation Survey Results Importance in average (1 -7) Preliminary results

Open Innovation Survey Results Importance in average (1 -7) Preliminary results

Open Innovation Survey Results 30% accessed external knowledge revealed intenal knowledge to outsiders 27% 26% 25% 22% 20% 19% 16% 14% 12% 10% 9% 7% 6% 4% 1% 0% 1 2 3 4 not accessed/revealed 5 6 7 Frequently accessed/revealed Preliminary results

Common Challenges • What is the role of internal R&D in open innovation? – (do I still have a job? ) • What do you do about IP protection? • How do SMEs avoid exploitation by large firms?

New Applications of Open Innovation • • • DIY Wine Social Sector Pharma IP and Universities 44

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Naked Wines • • • Crowdfunding Maker Foundry Wine Club Online 46

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Emergency Core Activities • • • Collection of funds Special training for professional doctors Negotiation with local authorities Integration of local citizens into workforce Transfer of medical centers to local authorities

Outside – In Open Innovation • Negotiate entry strategy • Identify the right local partners • Provide medical treatment according to local rules and norms • Large use of local staff

Inside-Out Open Innovation • Families of people treated are considered stakeholders as well as the patients. • “Exit Strategy”: leave behind effective medical facilities and staff • Transfer of trained personnel to other local (private) hospitals

An Open (but tightly controlled) Platform • Emergency brings in external money, technology and competence to conflict zone • Blend of local needs and competences with core procedures, routines. With no exceptions. • Non negotiable preconditions: – Local authorities need to accept basic Emergency values – Local personnel need to work according to Emergency guidelines – International staff need to be respectful of Emergency’s rigid safety rules and norms of behavior

All Patents are not Equal Core Patents Important Patents Other Patents

Guard Closely Share Selectively Core Patents Important Patents Other Patents Share Broadly

Balancing Openness and Industry Needs: A Proposed Continuum Restricted Open Gifts Commons Consortia Grants Research Contracts Overhead $, IP rights Adapted from Carol Mimura presentation, 9/29/2008 © 2008 Henry Chesbrough 54

Balancing Openness and Industry Needs: A Proposed Continuum Science Commons Intel, Citris Open Gifts Commons Consortia TTO Patent BP ‘s EBI - License Restricted Grants Research Contracts Overhead $, IP rights © 2008 Henry Chesbrough 55

Figure 1 - Evolution of Semiconductor Business Networks System TSMC IP Foundry Captive Memory IDM Memory Integrated System IDM Model Chip Design Fabless Foundry © 2010 Henry Chesbrough Model Foundry Open Innovation Platform External IP Chip Design TSMC Open Innovation Platform 56

TSMC’s Open Innovation Platform • TSMC has >50% share of foundry capacity WW • External suppliers of design and process IP design for TSMC first – TSMC has vast internal library of IP – TSMC tests and validates third-party IP on its processes • Open Innovation Platform: TSMC now certifies that designs compliant with its Platform will yield first time through the process • Tremendous competitive barrier to overcome © 2010 Henry Chesbrough 57