module iv open innovation

8/8/2019 Module IV Open Innovation

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Open Innovat ion

Module IV

Peter A. Koen, Ph.D.Associate ProfessorDepartment of ManagementPhone: 201-216-5406E-mail: [email protected]

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Agenda

Closed Innovation Model

Open Innovation

IBM, Intel, P&G, Apple and Lego

Intermediaries

Innocentive, Nine Sigma and YourEncore


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Closed Innovat ion Model

The Chemicals Industry Germany and later US

Edison, GE, and the rise of electrification

Rockefeller and Standard Oil

World W ar II scientific achievements

Great Successes

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Closed Innovat ion

New ProductDevelopment

Front End ofInnovation

CurrentMarket

Closed Innovation Paradigm

InternalTechnology

Base


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Hidden Assumptions

Closed Innovat ion

If I discover it, I w ill find a market for it

If I discover it first, I w ill own it

The important technologies I w ill need can beanticipated in advance

The best people in this field work for us

Pick a man of genius, give him money, andleave him alone Conant, Harvard

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Closed Innovat ion

Principal Erosion Factors

Mobility of highly experienced and skilled people

Focus of science in Academia

Enormous increase in Venture Capital

What changed?


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Ec onomies o f Sca le

US Enterprise Size

Source: National Science Foundation, Science Resource Studies, Survey of Industrial Research Development, 1991 and 1999.

41.4%67.7%70.7%25,000+

13.6%10.0 %13.1%10,000 24,999

9.0%5.5%5.8%5,000 9,999

13.6%7.6 %6.1%1,000 4,999

22.5%9.2%4.4%< 1000

199919891981Size (# ofemployees)

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Techn ic a l AND Marke t Unc er ta in t y

Cannot focus R&D if market application isunknown

If everything matters, nothing has priority

Cannot solve by more planning not onlyunknown, but unknowable

Must experiment, adapt, and iterate


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Playi ng Chess vs. Playi ng Pok er

Chess

Plan several moves ahead

No new informationneeded

You know what youve got,what opponent has

Poker

Pay to play

Pay for new information

You discover what youvegot, what other playershave

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Adobe

Warnock and Geschke at PARC

Creating fonts for Star Workstation

Wanted to make into a standard

Xerox said no: how can we make money if wegive it away?

They leave, and form Adobe

Initial plan

Turn key publishing system, complete with ownhardware, software, and fonts


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Adobe

We were originally going to supply a turn key systems solutionincluding hardware, printers, software, etc.

Steve Jobs and Gordon Bell were key ingredients in getting thingsgoing

Gordon said, dont do the whole system

Steve said, just sell us the software.

Thats how the business plan formed. It wasnt there in thebeginning.

Reference: Charles Geschke

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0

5000

10000

15000

20000

25000

30000

35000

40000

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Year

US

Dollars(millions)

Xerox 3Com Adobe

Doc Sci Documentum FileNet

Komag Objectshare SynOptics

SDLI VLSI Sum (10)

Xerox

Great at Chess, but lousy at Poker


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Lessons f rom Xerox

Xeroxs managers were NOT idiots

PARC was m anaged according to the bestpractices of the day

30+ years of funding PARC

Tremendous science and technology

No process to manage Playing Poker

A new paradigm is required

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Shor te r Product L i fec yc les

Conventional

Volume

Intro-

duction Ramp

-up

MaturityEndof

life

DevelopmentDramaticend of life

Shorter timeto market

Fast

ramp

-up

Demandfluctuation

Higherpeak

Digital Consumer

3-5 years1 year

Source: Dr Tsugio Makimoto - Hitachi/Sony

Faster and efficient R& D processes required


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Shor te r Product L i fec yc les

Faster and efficient R& D processes required

Speed-to-Mark et is CriticalIncreasing the Need for External

Collaboration

There is an increasing need forexternal collaboration and efficiencyin R&D to accelerate speed-to-market

Greater Need for Corporations to Gain Access toInnovation Occurring Outside its Boundaries

Non-corporate ResearchOrganization Focus On Long-term

Innovation

Corporate research labs forced tofocus on increasingly shorter productcycles

More opportunity for smallcompanies and individual inventorsto generate breakthroughs with longterm impact

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Agenda


Open Innovation


Intermediaries



9/23

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Open Innovat ion

New ProductDevelopment

Front End ofInnovation

CurrentMarket

Open Innovation Paradigm

InternalTechnology

Base

ExternalTechnology

BaseTechnologyInsourcing

NewMarket

Other FirmsMarket

TechnologySpin Offs

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IBM & Open Innovat ion

Current

Market

InternalTechnology

Base

ExternalTechnology

Base

TechnologyInsourcing

NewMarket

Other FirmsMarket

Java andLinux

$1.9 B LicensingOEM for Semi Cond CoOEM for others


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IBM

Materials

Chips, Devices

Computers

OperatingSystems

Productivity

Applications

Value Chain

Hidden Assumptions (Closed Value Chain)

Atoms

Solutions

Valu

e

Added

Activities

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IBM

Materials

Chips, Devices

Computers

OperatingSystems

Productivity

Applications

IBM

Unbundling the Value Chain

Atoms

SolutionsIntegration

Materials

Chips, Devices

Computers

OperatingSystems

Productivity

Applications

Other Integrators

OEM

ValueA

dded

Activities


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In t e l and Open Innovat ion

CurrentMarket

InternalTechnology

Base

ExternalTechnology

Base


NewMarket

Other FirmsMarket

Universities

IntelCapital

Acquisitions

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In t e l s Univers it y model

Intel contributes over $100 million annually toleading US universities (15) and overseasuniversities (12)

This is not philanthropy

Intel defines prom ising areas of scientific andengineering research to focus its $

After the NIH and NSF, Intel is one of the biggestfunding sources in its chosen areas

Elicits proposals from university researchers

Negotiates access to university IP at theuniversity, prior to funding research there


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In te l s la tes t m ove: Lab le ts

Intel initiated (fall 2002) four smaller researchcenters, located immediately adjacent touniversities at

U Washington

Berkeley

CMU

Cambridge

Each center is led by University academic

Intent ion is joint research

Intel staff measured on joint collaborativeresearch efforts

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P& G & Open Innovat ion

CurrentMarket

InternalTechnology

Base

ExternalTechnology

Base


NewMarket

Other FirmsMarket

TechnologyScouts

VentureAcquisitions

(ex: Spinbrush)

LargeAcquisitions(Ex: LOreal)

Connect and Develop Use it orLose it


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P& G Financia l Per formanc e

4.7

4.5

4

3.9

3.53.4

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005

Sales(Billions)

3

3.5

4

4.5

5

%

R&D

Sales % R&D

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P& G & Open Innovat ion

ExternalTechnology

Base

Technology Entrepreneurs (70)

Discovered 10,000 products, productideas and promising technologies.For every 100 ideas found from theoutside, one ends up in the market

China (High quality materials andcost innovations)

India (Solve problems inmanufacturing process)

Japan

Western Europe

Latin America

US

Suppliers

Share technology briefs withsuppliers using a secure IT

platform


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Use i t or Lose i t

Use it orLose it

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Use i t or lose i t

Use the best

Divest the rest

License,commercialize

Maintain(Confidential to

Company)Donate Retire

Income, royalties,equity stakesNone

TaxDeduction

Savings on main-tenance expenses

Action

Value beyondcore business

Could patent have commercialvalue with additionaldevelopment?

Is patent truly worthlessWhat is the donation value? Is there any reason not to

retire the patent?

Licensing - Traditional View


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Use the best Divest the rest

License,commercialize

Donate Retire

Income, royalties,equity stakes

TaxDeduction

Savings on main-tenance expenses

Action

Value beyondcore business

Could patent have commercialvalue with additionaldevelopment?

Is patent truly worthlessWhat is the donation value? Is there any reason not toretire the patent?

Licensing - The new world

What applications exist beyondcore industries?

Who would be interested in thepatent?

What is the rough value of thepatent?

Is value best captured throughlicensing, commercialization?

MaintainConfidential to

Company)

None

Use i t or lose i t

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IBM

Generated $1.8 Billion from royalties and income (16percent of net income in 2000)

Proctor and Gamble

Generated in 2002 over $2 billion in sales

Licensing - The new world

Use i t or lose i t


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ALL technologies are candidates for licensing

Licensing policy

3 years after market introduction

5 years after patent is granted

Packaging may be immediately licensed

P&G retains the right to practice

Will license to competitors

P&G quote We have no competitors, only customers.

Licensing at Proctor and Gamble

Sakkab, N. Connect and Develop Compliments Research and Development at P&G, Research Technology Management,38-45; 45(2), Mar/April 2002.

Use i t or lose i t

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Let the numbers guide the decisions Higher NPV to out license vs. keep internal Will sell, donate, swap, collaborate for capital avoidance Will trade for lower process Will use to minimize litigation costs

Separate Business Unit facilitates the process Business Unit is Staffed with approximately 40 people

Approximately 100 a deals a year with about 100 companies/year

Deal revenue returns to business unit

Partnered wi th ww w.yet2.com to post their technologiesavailable for license

Licensing at Proctor and Gamble

Use i t or lose i t


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Yet2 .com

On line marketplacefor intellectual

property exchange

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Agenda


Open Innovation


Intermediaries



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In te rmed iar ies

CurrentMarket

InternalTechnology

Base

ExternalTechnology

Base


NewMarket

Other FirmsMarket

AcquisitionsInnoCentiveNineSigma

YourEncore

NVPLLC: spinoffs

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Innocent i ve

Innocentivebrokers solutions to

narrowly definedscientific problems


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Innocent i ve

Example problem from I nnocentive

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Innocent i ve

221 individuals expressed interest in solving theproblem and create project rooms onInnoCentive.com web site

10 individuals from 7 countries subm it chemicals foranalysis

Retired scientist with wet lab in his backyard wins

Solution


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Innocent i ve

Problems posted appear mostly as organicsynthesis problems

P&G reports that 1/ 3 of problems posted aresolved

Another client* reported and ROI of 2,175% on12 posted problems

Total bounty awarded: $333,500

Internal costs: $60,000

Value generated: $10,300,000

Raynor, M. and Panetta, J., A Better Way to R&D, Strategy and Innovation, HBR Newsletter, Reprint S0503E, March April 2005.

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NineSigma

NineSigma connectscompanies w ith

technology problems w ith700,000 potential solvers


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YourEncore

YourEncore allowscompany to contract

short term assignmentswith 800 high performing

retired scientists andengineers from over 150

companies atpreretirement salary

adjusted for inflation

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NineSigma

P&G helped create NineSigma

P&G has distributed 100 technology briefs to over 700,000people

Completed 100 projects with 45% of them leading to agreementfor further collaboration

Company preparestechnology briefwhich describes

the problem

NineSigma posts problem700,000 solution providers

at other companies,universities, governmentand private laboratories

Solvers submitsnon-confidentialproposal back to

NineSigma

Company connects withsolver if project has meritfor further collaboration


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Open Innovat ion

What it is

Strategic IP management

Strategic R&D

Technology + business model

Technical invention

Win-win partnership

Core R&D processes

Innovation ecosystem building

improving R&D ROI

What it is NOT

Free access to corp.technologies

Outsourced R&D

Technology only

Commercial innovation

Appropriating value

New ventures

Partnerships

Cutting research costs

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Why is Open Innovat ion Cr i t ic a l?

A more agile R & D process

Increased ability to turn on a dime and adjust to unpredictablemarket shifts

A higher new product hit rate

Increases the number of truly innovative products and commercialsuccesses

A greater effectiveness of R & D

Higher new product success rate through iterative researcher &

customers contact Faster time-to-market and lower development spend

Decreased Risk of Missing Market Opportunities

Fewer false negatives given early exposure to market and alternativedevelopment paths; also less risk of being blind-sided by competitiveproduct, technology, service introductions

Growth and Renewal


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Logic o f Open Innovat ion

Good ideas are w idely distributed today. No onehas a monopoly on useful know ledge anymore.

Industrial innovation processes must play poker,as well as chess

We must manage IP in order to manage research:

Need to access external IP to fuel our business model

Need to profit from our own IP in others businessmodel

Not all of the smart people in the world w ork forus.

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