Open Innovation Past and Present: an Exclusive Interview with Henry Chesbrough

By: Oana-Maria Pop

Though intensely talked about, open innovation remains a subject matter that both fascinates and creates apprehension among business professionals. In the following interview, Henry Chesbrough, the father of open innovation according to Wikipedia, has sat down with IM.se to discuss a few key aspects of this largely new and challenging innovation model: its evolution, its applicability and most importantly, its essential role in facilitating knowledge creation for the future. He teaches at UC Berkeley’s Haas School of Business, and Esade Business School in Barcelona.

Prof. Chesbrough, could you give us a brief synthesis the Open Innovation movement’s evolution over the last 10 years?

To put my response into context, when I wrote the first book in 2003, I ran a Google search on the term open innovation.  The result: 200 page links that said “company X opened its innovation office at location Y”, but really no meaning to the two words together as a phrase.  By contrast, when preparing for a talk last month, that same search generated 483 million links, most of which addressed this new and very different model of innovation.  Moreover, there have now been hundreds of academic articles written on the open innovation approach, and there is even an annual PhD conference that trains dozens of new scholars each year who are writing dissertations on the topic. So yes, it had become a movement in its own right.

Given this remarkable pace, is it sensible to state that open innovation is reaching a tipping point?

Here I would like to make a distinction between two important kinds of open innovation: Outside-In and Inside-Out Open Innovation.

The Outside-In part of Open Innovation involves opening up a company’s own innovation processes to many kinds of external inputs and contributions.  It is this aspect of open innovation that has received the greatest attention, both in academic research and in industry practice.  Inside-Out Open Innovation on the other hand requires organizations to allow unused and under-utilized ideas to go outside the organization for others to employ in their businesses.  In contrast to the Outside-In branch of open innovation, this portion of the model is less well understood, both in academic research and also in industry practice.

Thus, I would say that Outside-In Open Innovation is widely accepted, and probably is facing a tipping point, whereas companies are now looking for real business results from using it.  Inside-Out Open Innovation, by comparison, remains at an early level of development.

Does the above hold true for business model innovation and IP management?

As you know, in my second book, Open Business Models: How to Thrive in the New Innovation Landscape (Harvard Business School Press, 2006), I explored the treatment of intellectual property in the innovation process, and the concept of business model innovation.

Countering the Closed model (where entities historically accumulated intellectual property to provide design freedom to their staff, obtain liberty to operate, and generally avoid costly litigation) implies that companies should be both active sellers of IP when it does not fit their own business model and active buyers of IP whenever external IP does fit their own business model. This has been slower to take root in peoples’ minds than the original concept of open innovation itself since IP is a challenging area for non-lawyers to manage.

However, business model innovation is becoming a growing area of interest for many practitioners and academics altogether.  While my book was among the first to link innovation results to the fit with the prevailing business model, this is an area that is now considered by organizations that treat R&D activities quite separately from the design and improvement of business models.

To sum up, IP management (much like  Inside-Out Open Innovation) rests at an early stage of development, while business model innovation is visibly beginning to take off.

Coming to your most recent book Open Services Innovation: Rethinking Your Business to Grow and Compete in a New Era (Jossey-Bass, 2011) you argue that open innovation is needed not only at the manufacturing level but also at the services level for a more meaningful customer experience to emerge. How are companies adapting to this new paradigm?

One important development in open innovation is the consideration of how innovation occurs in services. To give you an example, most of the top 40 economies in the OECD have half or more of their GDP from services and many companies are witnessing a shift in tis direction as well. For instance, Xerox now gets more than 25 percent of its revenues from services. IBM is another classic case, along with GE and Honeywell.

In some instances what is really happening is that the business model is shifting, which can turn a product business into more of a service business. For example, a GE aircraft engine can be sold for tens of millions of dollars to an airframe manufacturer. That same engine can also be leased on a so-called “power by the hour” to the same company. In the first case it is a product transaction, while in the second case it becomes a service from which GE profits greatly in the aftermarket sales and service, spare parts, etc., that accrue during the 30 year operating life of the engine.

There is actually more value not in coming up with yet another building block of technology, but rather in coming up with the architecture that connects these things together in useful ways that solves real problems before other people do.

More generally for services, innovation must negotiate a tension between standardization and customization. The resolution to this dichotomy is to construct service platforms that invite others to build on top of one’s own offering, so that there are economies from standardization in the platform, along with customization via the participation of many others adding to the platform.  Recall that a fundamental premise of open innovation is “not all the smart people work for you”.  If that is the case, there is actually more value not in coming up with yet another building block of technology, but rather in coming up with the architecture that connects these things together in useful ways that solves real problems before other people do.

Another noticeable fact is that Open Innovation has become one of the most wide-spread “prescriptions” for company revival and ultimately survival. Can it also have unintended side-effects?

The question of unintended side effects for open innovation is one area where we need a lot more work since academics are still publishing open innovation success cases for the most part.  Companies are trumpeting their successes; consulting firms are packaging open innovation services for interested clients – none of these groups so far have had much to say about open innovation failures.

Some practitioners consider open innovation to be a rationale for outsourcing R&D but this misunderstands the nature of innovation, and can lead to severe side effects.  To really transfer knowledge effectively in a way companies can really make use of it, one needs a certain amount of creative abrasion and a certain amount of dwell time together working on it. Open Innovation works best when you have people collaborating side by side, with people that are moving from one organization to another. These aren’t people from Purchasing, but instead are very talented people from your own organization.  A related requirement are people who operate in a boundary spanning role to connect knowledge from difference sources, and find ways to mash them together. Such people are sometimes termed “T-shaped managers”.

In this way, you could argue that they were too open in their innovation process.

A very public example of this side effect came from Boeing’s outsourcing of many design elements of its 787 Dreamliner plane. The good news is that the company engaged its major subcontractors as design partners, who contributed significantly to the design and put up part of the capital needed to build the plane.  But there were numerous areas where the pieces didn’t work when initially put together.  Boeing eventually acquired one of the subcontractors, and had to invest billions in redesigning the integration of the pieces. In this way, you could argue that they were too open in their innovation process.

Another example of perhaps too much open innovation came from the financial services sector, in which complex financial derivatives grew to such a large extent that they exceeded the ability of regulators to comprehend and manage them. Indeed, companies themselves did not fully appreciate the risks they had taken on: by packaging these financial risks, syndicating them to a wide variety of outside parties, and ultimately creating enormous financial losses, we were clearly worse off for all this “innovation”!

To what extent do you believe that formal Innovation Management education can ensure a better “rate of absorption” of open innovation practices?

Since I work as a professor, you can guess my answer here!  In order for formal management education to really help companies absorb open innovation, it is important to not only describe the theories, but also share the extensive empirical observations that support these. Companies are continuously innovating, and the process of innovation is changing as well. Hence, if we can fascinate our students with the cool things companies are doing, get them to grapple with the problems many entities are struggling with, and, most importantly, confront them with both failures and well as the successes, then I believe students will find innovation management to be a vitally interesting area of study.

Finally, can you tell our readers a few words about your most recent research and perhaps name a few emerging and noteworthy trends in your subject area?

Open Innovation began as a series of collaborations between two organizations to open up the internal innovation process. Today, though, we see many instances in which the concept is being used to orchestrate a significant number of players across multiple roles in the innovation process. Put simply, designing and managing innovation communities shall become increasingly important to open innovation’s future.

Let me illustrate this point with two rather distinct examples.

My first one comes from Taiwan Semiconductor Manufacturing Corporation. TSMC provides manufacturing services from its manufacturing facilities (foundries) to its clients, who design new semiconductor chips.  This saves TSMC’s customers from having to invest in expensive manufacturing plants to manufacture chips. Otherwise put, they rely on companies like TSMC to do the fabrication work for them.

Designing chips requires customers to use a variety of design tools, such as reference designs and process recipes. With the growth of TSMC’s business ecosystem, many of the third party companies who make these tools all began to take steps to assure their customers that their offerings would run on TSMC’s processes.  This expansion in third party tool offerings creates more design options for TSMC’s customers – a clear benefit. However, these new offerings also increase the complexity for TSMC’s customers to manage, and this complexity risks causing new chips to require re-designs or other expensive modifications to be manufactured correctly – a clear risk.

TSMC has addressed this risk with its Open Innovation Platform. It all starts by combining the many design and manufacturing services of TSMC with those provided by many third party companies, and then testing these all together.  TSMC then certifies to customers of those offerings that they can use these tools with confidence that the chip will turn out properly the first time through the process.  The result is faster time to market for TSMC’s customers, at a lower cost of design.  So TSMC uses open innovation to manage a complex ecosystem of internal and external design sources, and provides a guarantee to its customers, provided they stick to these validated resources when designing their chips.

My second example comes from GE, and its recent ecomagination challenge.  While GE has a very large energy business of its own, with revenues of nearly $40 billion annually, the company has noticed a great deal of venture capital and startup activity in green and renewable energy technologies.  Recognizing its own limits, GE sought to establish a process to tap into the potential project ideas out there that had the potential to become promising new ventures in green and/or renewable energy.

But GE did this in an open way. Instead of doing all the work themselves, they enlisted four active VC firms who had already had experience investing in this space.  Together, the four VCs and GE pledged a total of $200 million to invest in attractive startup ventures.  The ecomagination challenge was born.  In July of 2010, the challenge was launched to the world, and everyone was invited to submit potential project ideas for consideration for startup investment.

23 ventures have been funded, with five other projects receiving other awards, and even a People’s choice award was given as well.

In the process, more than 3,800 venture proposals were received. As of this writing, 23 ventures have been funded, with five other projects receiving other awards, and even a People’s choice award was given as well. While the ventures are quite young, the VCs and GE are all enthusiastic about the experience. GE’s level of enthusiasm has led them to adapt the model to the health care space (a Healthymagination challenge was launched in 2011) and also in China (a challenge is underway there as well).

As the future unfolds, I expect universities to become more welcoming of open innovation and firmly believe that public policies will be adapted to support this movement. At the same time, the innovation capabilities of organizations around the world will no longer stop at the boundaries of one’s own organization. Instead, an organization’s open innovation practices will extend to suppliers, customers, partners, third parties, and the general community as a whole.

By Oana-Maria Pop