Open Innovation

Module IV

Peter A. Koen, Ph.D.

Associate Professor
Department of Management
Phone: 201-216-5406
E-mail: pkoen@stevens.edu

Agenda

] Closed Innovation Model

] Open Innovation
\ IBM, Intel, P&G, Apple and Lego

] Intermediaries
\ Innocentive, Nine Sigma and YourEncore

2
Closed Innovation Model

Great Successes

] The Chemicals Industry – Germany and later US

] Edison, GE, and the rise of electrification

] Rockefeller and Standard Oil

] World War II scientific achievements

Closed Innovation

Closed Innovation Paradigm

Front End of
Innovation
New Product
Development

Internal Current
Technology Market
Base

4
Closed Innovation

Hidden Assumptions

] If I discover it, I will find a market for it

] If I discover it first, I will own it
] The important technologies I will need can be
anticipated in advance
] The best people in this field work for us

“Pick a man of genius, give him money, and

leave him alone” – Conant, Harvard
5

Closed Innovation

What changed?

] Principal Erosion Factors

\ Mobility of highly experienced and skilled people
\ Focus of science in Academia
\ Enormous increase in Venture Capital

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 Economies of Scale

US Enterprise Size

Size (# of 1981 1989 1999

employees)
< 1000 4.4% 9.2% 22.5%
1,000 – 4,999 6.1% 7.6 % 13.6%
5,000 – 9,999 5.8% 5.5% 9.0%
10,000 – 24,999 13.1% 10.0 % 13.6%
25,000+ 70.7% 67.7% 41.4%

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

] Cannot focus R&D if market application is

unknown
\ If everything matters, nothing has priority
] Cannot solve by more planning – not only
unknown, but unknowable
] Must experiment, adapt, and iterate

8
Playing Chess vs. Playing Poker

] Chess ] Poker
\ Plan several moves ahead \ Pay to play
\ No new information \ Pay for new information
needed \ You discover what you’ve
\ You know what you’ve got, got, what other players
what opponent has have

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 we
give it away?”
] They leave, and form Adobe
] Initial plan
\ Turn key publishing system, complete with own
hardware, software, and fonts

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Adobe

“We were originally going to supply a turn key systems solution

including hardware, printers, software, etc.”

“Steve Jobs and Gordon Bell were key ingredients in getting things
going…”

Gordon said, “don’t do the whole system”

Steve said, “just sell us the software”.

That’s how the business plan formed. It wasn’t there in the

beginning.”

Reference: Charles Geschke

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Xerox

Great at Chess, but lousy at Poker

40000

Xerox 3Com A dobe

35000
Doc Sci Documentum FileNet

30000 Komag Objectshare SynOptics

US Dollars (millions)

SDLI VLSI Sum (10)

25000

20000

15000

10000

5000

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12
Year
 Lessons from Xerox

] Xerox’s managers were NOT idiots

] PARC was managed according to the “best
practices” of the day
\ 30+ years of funding PARC
\ Tremendous science and technology
\ No process to manage “Playing Poker”
] A new paradigm is required

13

Shorter Product Lifecycles

Faster and efficient R& D processes required

Demand
fluctuation
Higher
peak
Volume

ramp-up
Fast

Maturity
u p En
Intro- p-
duction Ra
m life d of 1 year
3-5 years
Shorter time Dramatic
Development to market end of life

Conventional Digital Consumer

Source: Dr Tsugio Makimoto - Hitachi/Sony 14

Shorter Product Lifecycles

Faster and efficient R& D processes required

Non-corporate Research
Speed-to-Market is Critical Organization Focus On Long-term
Increasing the Need for External Innovation
Collaboration \ Corporate research labs forced to
\ There is an increasing need for focus on increasingly shorter product
external collaboration and efficiency cycles
in R&D to accelerate speed-to- \ More opportunity for small
market companies and individual inventors
to generate breakthroughs with long
term impact

Greater Need for Corporations to Gain Access to

Innovation Occurring Outside its Boundaries 15

Agenda

 Closed Innovation Model

] Open Innovation
\ IBM, Intel, P&G, Apple and Lego

] Intermediaries
\ Innocentive, Nine Sigma and YourEncore

16
Open Innovation

Open Innovation Paradigm

Technology Other Firm’s
Spin Offs Market

New
Internal Market
Technology
Base
Current
Market
External
Technology
Base
Technology
Insourcing
Front End of
Innovation New Product
Development 17

IBM & Open Innovation

$1.9 B Licensing
OEM for Semi Cond Co
OEM for others Other Firm’s
Market

New
Internal Market
Technology
Base
Current
Market
External
Technology
Base
Technology
Insourcing
Java and
Linux 18
 IBM

Hidden Assumptions (Closed Value Chain)

Solutions
Value Added Activities

Applications
Productivity
Operating
Systems
Computers
Chips, Devices
Atoms Materials

Value Chain
19

IBM

Unbundling the Value Chain

Solutions
Value Added Activities

Integration Other Integrators

Applications Applications
Productivity Productivity
Operating Operating
Systems Systems
Computers Computers
Chips, Devices Chips, Devices
Atoms Materials Materials

IBM OEM
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Intel and Open Innovation

Other Firm’s
Market

New
Internal Market
Technology
Base
Current
Market
External
Technology
Base
Intel Acquisitions
Capital
Universities
Technology
Insourcing
21

Intel’s University model

] Intel contributes over $100 million annually to

leading US universities (15) and overseas
universities (12)
\ This is not philanthropy
] Intel defines promising areas of scientific and
engineering research to focus its $
\ After the NIH and NSF, Intel is one of the biggest
funding sources in its chosen areas
] Elicits proposals from university researchers
] Negotiates access to university IP at the
university, prior to funding research there
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Intel’s latest move: “Lablets”

] Intel initiated (fall 2002) four smaller research

centers, located immediately adjacent to
universities at
\ U Washington
\ Berkeley
\ CMU
\ Cambridge
] Each center is led by University academic
] Intention is joint research
] Intel staff measured on joint collaborative
research efforts
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P&G & Open Innovation

Other Firm’s
Connect and Develop Use it or Market
Lose it

New
Internal Market
Technology
Base
Current
Market
External
Technology
Base
Venture Large
Acquisitions Acquisitions
Technology (Ex: L’Oreal)
Scouts (ex: Spinbrush)

Technology
Insourcing 24
 P&G Financial Performance

60 5

50 4.7
4.5 4.5
40

Sales (Billions)

% R&D
30 4 4
3.9

20
3.5 3.5
3.4
10

0 3
2000 2001 2002 2003 2004 2005

Sales % R&D

25

P&G & Open Innovation

External
Technology
Base
] Technology Entrepreneurs (70)
Discovered 10,000 products, product
ideas and promising technologies.
] Suppliers
For every 100 ideas found from the
outside, one ends up in the market \ Share technology briefs with
suppliers using a secure IT
\ China (High quality materials and
platform
cost innovations)
\ India (Solve problems in
manufacturing process)
\ Japan
\ Western Europe
\ Latin America
\ US 26
 Use it or Lose it

Use it or
Lose it

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Use it or lose it

Licensing - Traditional View

Divest the rest

] Could patent have commercial

value with additional
development?
Use the best ] Is patent truly worthless
] What is the donation value?
] Is there any reason not to
retire the patent?

Maintain
License,
Action (Confidential to Donate Retire
commercialize
Company)
Value beyond Income, royalties, Tax Savings on main-
core business None equity stakes Deduction tenance expenses
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 Use it or lose it

Licensing - The “new” world

Use the best Divest the rest

] What applications exist beyond

core industries? ] Could patent have commercial
] Who would be interested in the value with additional
patent? development?
] What is the rough value of the ] Is patent truly worthless
patent? ] What is the donation value?
] Is value best captured through ] Is there any reason not to
licensing, commercialization? retire the patent?

Maintain
License,
Action “Confidential to Donate Retire
commercialize
Company)
Value beyond Income, royalties, Tax Savings on main-
core business None equity stakes Deduction tenance expenses
29

Use it or lose it

Licensing - The “new” world

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

] Proctor and Gamble

\ Generated in 2002 over $2 billion in sales

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 Use it or lose it

Licensing at Proctor and Gamble

] 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.”

Sakkab, N. “Connect and Develop Compliments Research and Development at P&G,” Research Technology Management,
38-45; 45(2), Mar/April 2002. 31

Use it or lose it

Licensing at Proctor and Gamble

] 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 with www.yet2.com to post their technologies

available for license
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Yet2.com

On line marketplace
for intellectual
property exchange

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Agenda

 Closed Innovation Model

 Open Innovation
IBM, Intel, P&G, Apple and Lego

] Intermediaries
\ Innocentive, Nine Sigma and YourEncore

34
 Intermediaries

Other Firm’s
NVPLLC: spinoffs
Market

New
Internal Market
Technology
Base
Current
Market
External
Technology
Base
Acquisitions
InnoCentive
NineSigma
YourEncore Technology
Insourcing
35

Innocentive

Innocentive
brokers solutions to
narrowly defined
scientific problems

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Innocentive

Example problem from Innocentive

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Innocentive

Solution

] 221 individuals expressed interest in solving the

problem and create project rooms on
InnoCentive.com web site

] 10 individuals from 7 countries submit chemicals for

analysis

] Retired scientist with wet lab in his backyard wins

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 Innocentive

] Problems posted appear mostly as organic

synthesis problems
] P&G reports that 1/3 of problems posted are
solved
] Another client* reported and ROI of 2,175% on
12 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.
39

NineSigma

NineSigma connects
companies with
technology problems with
700,000 potential solvers

40
 YourEncore

YourEncore allows
company to contract
short term assignments
with 800 high performing
retired scientists and
engineers from over 150
companies at
preretirement salary
adjusted for inflation

41

NineSigma

NineSigma posts problem

Company prepares Solvers submits
700,000 solution providers
technology brief non-confidential
at other companies,
which describes proposal back to
universities, government
the problem NineSigma
and private laboratories

Company connects with

solver if project has merit
for further collaboration

] P&G helped create NineSigma

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

people
\ Completed 100 projects with 45% of them leading to agreement
for further collaboration
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Open Innovation

What it is NOT What it is

] Free access to corp. ] Strategic IP management
technologies
] Outsourced R&D ] Strategic R&D
] Technology only ] Technology + business model
] Commercial innovation ] Technical invention
] Appropriating value ] Win-win partnership
] New ventures ] Core R&D processes
] Partnerships ] Innovation ecosystem building
] Cutting research costs ] improving R&D ROI

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Why is Open Innovation Critical?

Growth and Renewal

] A more agile R & D process
\ Increased ability to “turn on a dime” and adjust to unpredictable
market shifts
] A higher new product hit rate
\ Increases the number of truly innovative products and commercial
successes
] 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 alternative
development paths; also less risk of being “blind-sided” by competitive
product, technology, service introductions
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Logic of “Open Innovation”

] Good ideas are widely distributed today. No one

has a monopoly on useful knowledge 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’ business
model
] Not all of the smart people in the world work for
us.

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