00

Dr. Wolfgang HuhnMcKinsey & Company, Inc.

11. November 2014

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

Open Innovation und IoT –Innovativer Ansatz für den Mittelstand?

1

Contents

Using open innovation networks

Internet of things

Capturing new opportunities

2

For discussion: Open Innovation concept definition

The process of engaging resources outside of "traditional" development organizations to help identify, address, develop, or capture the value of growth opportunities

3

Most companies engaged in innovation focus on "close in" relationships with suppliers and known partners

Mass open innovation

Open innovation

Company R&D

No externalsources

Suppliers

Research partnerships

Academic partnerships

Development networks

Source: McKinsey survey

Use of external sources in innovation processPercent of respondents

34

18

34

18

19

67

18

4

To operationalize OI, you need four capabilities to get right

• OI methodology that works (not haphazard steps) – from defining the open network goals and partner engagement model to commercializing the resulting ideas

• Internal organizational abilities and roles – both OI dedicated roles and not, and enhanced skills to support OI methodology

• New management processes – so OI is driven effectively and in a repeatable manner

• Culture – significant change in mindsets and behaviors across the company and especially with management leadership to ensure OI is sufficiently supported

5

Successful operationalization of OI requires mitigation of key risks/failure modes

Limited IP control Establish upfront IP agreements

Wrong experts Cast a wide net and carefully filter to find well-matched experts to specific topic

Overload of too many disparate ideas

Have clear selection criteria to narrow ideas into 2-3 actionable proposals

Limited internal capacity to pursue new ideas derived through Open Innovation

Work with internal stakeholders from the start to ensure the groundwork is set for implementation

Risk Mitigation approach

Source: McKinsey, Innovation practice

6

What is a pop-up network?

What you know

What the world knows

A pop-up network goes beyond ideation, and will help you test or develop ideas and bring them to market

Source: McKinsey, Innovation Practice

7

Standing advisory panel

Standing advisory board

Roundtable

On-call advisors (e.g. GLG)

Crowd-sourcing (e.g. MedThink)

Surveys(e.g. NineSigma)

Competitions(e.g. X-Prize)

High

Relative cost

Low

Approx. Cost

• $500-1k/interview

• $5-10k/roundtable

• $20-30k/year

• $250-350k/year

• $10-50k/survey

• $25-100k

• $50k-1M

• Different types of external pop-up networks can be selected

• Similarly costs for internal networks can differ by extent and type of solution

External experts can be engaged through a variety of interactions

Source: McKinsey, team analysis

8

There are 5 critical steps required to leverage an Open Network

Define Open Network goals

Capitalize on top ideas

Identify ex-perts and Design engage-ment models

Launch & support engagements

Select top ideasMethod-ology

1 2 3 4 5

High-level activities

• Define role of open network and problem to be solved through open network (i.e., key questions to be answered by the network)

• Align on the type of deliverables the network should deliver

• Identify the type of participants and engage-ment models to deliver desired outcome

• Understand rationale for partners to engage

• Identify most promising inno-vation currency for “win-win” value ex-change with selected partners

• Establish internal organizational capabilities & supporting processes

• Provide adequate tools to make engagement easy for partners and maximize returns of partners’ work

• Launch program and build out network

• Surface emerging hot leads to the team

• Merge ideas with strategy and execution plan

• Bring concept “in” to development

• Reward participants

• Ensure smooth development

Source: McKinsey

9

Several companies leverage partnerships with innovation sourcing companies to leverage external expertise and source ideas

Source: Corporate website, McKinsey

IDENTIFY EXPERTS

▪ Technology marketplace that connects "innovationmanagers"1 to "solution providers"2

▪ Has distributed P&G tech briefs to over 700,000 people, leading to over 100 projects, with 45% agreements for further collaboration

▪ Similar to NineSigma but brokers solutions to more-narrowly defined specific scientific problems

▪ ~1/3 of problems posted by P&G on Innocentive have been solved

▪ Example solvers: graduate student in Spain and chemist in India

"Where the toughest problems meet the brightest minds."

"Accelerating the Innovation Cycle."

▪ Connects ~800 high-performing retired scientists and engineers

from 150 companieswith clients

▪ Can contract with retiree for a short-term project with relatively low-risk and low-cost

"Accelerating Innovation Through Proven Experience."

▪ Online marketplace for IP exchange▪ Brokers technology both into and out

of companies, labs, and universities▪ Allowed P&G to license low-cost

microneedle technology to drug-delivery company

"[Our] mission is to help you identify and capture the full value of your intellectual assets."

1 Includes P&G, DuPont, Abbot Labs, Air Products, Battelle, Johnson Controls, and others2 Includes Argonne National Labs, Cambridge University, Dow Corning, IIT Bombay, UC Berkeley, and others

10

Leveraging internal expertise is also critical in bringing the right expertise to the problem/issue

1 Nature Reviews Drug Discovery, May 2013

Before companies open up externally, they need to open up internally. Putting more information into a system can clog up internal information flow.1

– Henry Chesbrough, author of "Open Innovation"

Source: McKinsey

11

Contents

Internet of things

Using open innovation networks

Capturing new opportunities

12

The 3 main areas of IoT …

Source: McKinsey Global Institute "The Internet of Things and the future of manufacturing" by Markus Löffler and Andreas Tschiesner (June 2013)

Analyzeeverything

Networks everywhere

Sensors in everything

Integration of sensors into more physical devices

• Improved power management

• Miniaturization

• Reduced costs

• Location-based awareness

Build-up of ubiquitous networks (driven in particular by advances in wireless tech-nologies, incl.)

• Increasing bandwidth capabilities

• Open standards

• Reduced costs

Increasingly flexible and intelligent systems for data processing

• Increased computational power, memory, and storage

• Remote programmability

• Probabilistic decision making

13

Analyze everything

IIINetworks everywhere

IISensors in everything

I

Aggregation

Analysis

Visualization

Closed-loopactuation

Discoveryand ID

Networked data sources

Sensors

… comprise 6 primary components

Source: McKinsey Global Institute "The Internet of Things and the future of manufacturing" by Markus Löffler and Andreas Tschiesner (June 2013)

14

2009 10 201211

FDA approvesProteus,the first

digital pill

13 14 18 202015 16 17 19

More data will becollected daily

with Proteusthan search requests

on Google

?

Business models: Proteus gains full transparency on medication adherence of individual patients – a basis for P4P reimbursement

NEW STRATEGIC CONTROL POINTS

15

Contents

Using open innovation networks

Internet of things

Capturing new opportunities

16

Element of the full customer proposition

(product, service) in a given market segment

that needs to be owned/controlled by a

company in order to sustainably create profit

across the value chain

Control point

We coined the term "control point" to talk about elements in the value chain that have a high strategic relevance

Source: McKinsey

17

New control points in building technology?

Nest has created a remotely controlled thermostat which allows for energy savings thanks to an innovative auto-away function

▪ Product created by a California start-up founded by 2 Apple alums

▪ High-tech thermostat that learns from household's usage and nudges to conserve energy

▪ Can be remote-controlled from a smartphone, tablet, or Web browser

▪ Auto-away function: automatically turns down the system when people are away using built-in activity sensors to detect when people are moving around

▪ Compatible with 95% of US heating and cooling systems

Business model

▪ Shaking up the thermostat business

▪ Partnership with US energy companies which offer a rebate to their customers who purchase Nest thermostats

▪ Venture capital funding including Google Ventures

Installation

▪ Self-installation or by a certified technician

Channels

▪ On Nest Web site, Amazon, Apple's online store, and in all 1,700+ Lowe's stores

Vendor type

▪ Start-up

SOURCE: Website, press

NEW STRATEGIC CONTROL POINTS

Case overview Nest Smart Thermostat allows for efficient energy consumption

18

The application of the IoTin traditional industries Industry 4.0

Open innovation

ProfitManagement of strategic

control points

Summary

Ecosystem

19