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Open innovation: Shifting the paradigm
to reap more benefits from R&D?
Prof. dr. Wim Vanhaverbeke Hasselt University
ESADE Business School National University of Singapore
IASP - Bangkok - November 27, 2012
What is Open Innovation?
“Open innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively.”
Chesbrough, Vanhaverbeke, West Open Innovation: Researching a New Paradigm
(OUP, 2006)
A Closed Innovation System
Research Investigations
Development New Products /Services
The Market
Science &
Technology Base
R D Source: Henry Chesbrough
What changed? New Division of Innovation Labor n Increasingly mobile trained workers n More capable universities n Knowledge distributed more widely throughout
the world n Diminished US hegemony in many leading
technology fields n Erosion of oligopoly market positions n Deregulation (EU-liberalization) n Enormous increase in Venture Capital
Source: Henry Chesbrough
Current Market
Internal Technology
Base
R D
Inbound OI: Filling the gaps with external technology
Technology Insourcing
New Market
External Technology
Base External research projects
Venture investing
Technology in-licensing Technology acquisition
Source: H. Chesbrough, Sloan Management Review, Spring 2003
Breakaway innovation takes a lot of time for reaching large business sizes
Immediate growth requires acquisition of early growth ventures
Source: Loek Nijman - Philips
CAGR
Revenue in 10 years
100
10M 100M 1B
10
1M
Start 600 K
Start 600 K
Start 600 K
10% 3M
30% 10M
75% 1B
Acq. 60M 30% 1B
Venturing in the outside world
2
Current Market
Internal Technology
Base
R D
Outbound OI: Profiting from others’ use of your technology
Technology Insourcing
New Market
Technology Spin-offs
External Technology
Base
Other Firm’s Market
Licensing
Source: H. Chesbrough, Sloan Management Review, Spring 2003
The economic pressures on innovation
Costs
Revenues
Own market revenue Own market
revenue
Internal dev. costs Internal
dev. costs
Closed model – before
Closed model – after
Shorter product life cycle in the market
Rising costs of innovation
Chesbrough, H. (2006)
0
The new business model of open innovation
Costs
Revenues
Own market revenue
Own market revenue
Internal dev. costs
Internal & external dev. costs
Closed model - after
Open innovation business model
New revenues
Cost & time savings from leveraging external development
License
Spin-off
Sale / divesture
Chesbrough, H. (2006)
0
Extension of the original model
Going beyond product and service innovation
Business models - Chesbrough (2006)
n Performs two important functions: u it creates value, and u it captures a portion of that value
n Creation of value: by defining a range of activities that will yield a new product or service valued by a (target) customer group
n Value capturing: by establishing a unique resource, asset or position within that series of activities where the firm enjoys a competitive advantage
Open business models - Chesbrough (2006)
Division of labor: u one party develops a novel idea but does not carry this
idea to the market itself u sells it to another party,who carries it to the
Open business model: uses the division of labor to u create greater value by leveraging more ideas (external
ideas) u capture greater value by using key asset, resource, or
position not only in the company’s own business but also in other companies’ businesses
3
Broadening the scope n OI when it is not related to your NPD:
u You are a service company with no technical expertise
u SME with insufficient technological expertise u Government agency:
t Nasa: new technologies may help you a lot in your mission as space agency
n Insourcing knowledge of others in an indirect way through an open business model (OBM)
• KLM Royal Dutch Airlines, the North Sea Group and Spring Associates joined forces and founded SkyNRG in Nov 2009.
n Goal: to help create and accelerate the development of a market for sustainable jet fuel (safe, sustainable and affordable) & avoid large price swings in petro-based kerosene
n Creating a viable market for sustainable jet fuels for aviation can only be achieved by combining expertise and experience in the fields of air transport, product knowledge, R & D, regulation and effective sustainability criteria
n SkyNRG is the hub firm in the ecosystem
SkyNRG
Financial world
(VCs…)
Airline industry
Govern-mental
agencies
Biofuel value chain
KLM’s value driver? KLM profits as a
customer of a steady supply of sustainable and affordable biofuel
Open innovation: SkyNRG sets up the aviation
biofuel value chain and drives the acceleration of
joint technological innovations between
partners
What if your products are commodities?
n BP pumps crude oil from wells and produces petro products (commodities)
n Product innovation is not a value driver n Oil well exploration and extraction are major
value drivers n Collaborate with Schlumberger and others
technology services to advance their technology in order to find the best wells earlier than competitors.
Strategy as ecosystem building
n Two book to remember n What are the implications for OI? n Nambisan and Sawhney; Network-
centric innovation, AMP, 2011 u Tasks: - Innovation leverage
– Innovation coherence – Innovation appropriability
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Some shortcomings of OI
n Only large, technology user firms in the picture u What about small, high-tech technology suppliers
n Only technology driven focus (upstream partners)? u What about downstream partners? (Experience lab?)
n Only firm level analysis: No eco-system or network perspective u How to build an OI perspective at the network level?
n Absence of the geographical dimension u How to organize open innovation close by and at large
distance?
Broadening the scope of OI
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Global Local
Network
Firm
Individual Individual networks
Cross company teams
Local cooperation
Campus
Upstream partners
downstream partners
RIS NIS
National
Global economic trends
Virtual Networks e.g. LinkedIn
Cross company teams
Alliances
Your vision , your focus of a science park
n On which steps in the VC the campus is targeting at? n What are the benefits you want / can offer to the residents? n What is the optimal composition of campus residents? n Management: How to go from a closed to a open campus?
Benefits the HTC offers to its residents
24
Save on capital investments The Facilities
Outsourcing capabilities
Technology solutions
Value Network
The Services
The Experts
The Others
5
People/companies at HTC n Some 8,000 people (of which 2,500 Philips) n More than 100 companies, of which some 40 start-ups n Over 60 nationalities n Some 150 events yearly (business/technical/social) n The Campus is one of the 17% largest science parks
worldwide n The Campus has been designated by the Dutch Ministry of
Economic Affairs as a ‘campus of national significance’ n Campus companies are responsible for nearly 50% of all
patent applications in the Netherlands n Management no longer in hands of Philips
The right mix for your ecosystems
n What is the right mix for open innovation u Corporate innovators and start-up companies u Research institutes and universities u Technical services & business support u Network organizations u Venture Funds
n How to team up with partners outside the campus? n How to differentiate vis-à-vis other potential
locations? 28
Back to the funnel Joint R&D model: Access, shared, Dedicated
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A succesful(ly managed) OI Campus requires…
n Top class Campus management n Top class infrastructure n Growth towards independently run service and
research facilities n Campus ‘house rules’ n New attitude and thinking about (co-developed) IP n Emphasis on which info can be disclosed n Worlwide acquisition and PR strategy
30
OI and SMEs
OI: the Dutch situation Share of innovating companies cooperating for innovation
Based on quantitative analysis of Dutch CIS data Source: Batterink, 2009
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1994-1996 1996-1998 1998-2000 2000-2002 2002-2004
Shar
e of
inno
vati
ng fi
rms
adop
ting
ope
n in
nova
tion
Small (10-49 empl.)Medium (50-249 empl.)Large (>250 empl.)Total
But number of collaborations per employee is many times higher for SMEs than for large companies
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Low tech industries: A fruitful place for OI by SMEs
37
Curana
Curana: combining innovation and industrial design
n The old situation: u steel mudguards and fenders u Belgium as market (10 million inhabitants) u Family owned business
n Challenge: u Growing economies of scale and globalization of the
industry u Strategic change:
t differentiation through innovation t or price competition with low-cost import
Curana: B"Lite : Mudguard of Curana
24/11/12 Wim Vanhaverbeke 39
Curana: innovation combined with industrial design in low-tech markets
n Advantages: u Lighter mudguard (25% less weight than plastic
mudguards). u Production cost are low enough to be competitive with
standard mudguards u Installation of the mudguard is easier u Nice design u Aluminum separated by plastic can be used as a conductor
for electricity (no more wires required for lights) n IP
u European patents u Curana also applied for a patent on the production process
Curana: Open innovation in SMEs
n Open Innovation: u Combination of internal and external knowledge
t external design company t polymer extrusion manufacturer t Technology centers for technical advice t Mold makers …
u Coordination with customers (bicycle producers) in exchange of an exclusive deal that is limited in time t Batavus and Sparta (both belong to the Accell-
group)
7
Curana: Spectacular results
24/11/12 Wim Vanhaverbeke 42
Curana: a small company in transformation
24/11/12 Wim Vanhaverbeke 44
Original Design Manufacturer
• price setting • design driven • added value
OEM ODM OSM OBM
Original Equipment Manufacturer
• price pressure • technology driven • no added value
Original Strategic Management
• vision driven • proactive design solutions • Innovative
Original Brand Management
• Image driven • Reliability & authenticity • Market pull from customers
> > >
How innovation is processed at Curana?
24/11/12 Wim Vanhaverbeke 45
Exploration
Design
Realization
Promotion
Some JAGA products
50
Jaga n Differentiation vs. competition through:
u Eco-radiators u Design-radiators
n The company is not selling products but experiences, ideas, values, etc….
n Differences: u radiators as heating machines u radiators to reduce carbon-footprint u radiator as a creative part of the house, heating
the "soul"
Jaga Oxygen : controlling temperature,
moisture and oxygen in the house
Wearable heating?
Some JAGA products
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Jaga Experience Lab : JEL - Product: test-facility
- Experience: test and develop your own products
- Jaga invites professors & engineers worldwide
- Low cost form of publicity: new projects as Federation Tower / Telefonica
Open innovation # 1 Experience Strategy
Open innovation #2 Jaga Product days 2007 n Total number of projects: 119 n Total number of products by 1 or more designers/engineers: 70 n Total number of products created by non professionals: 49 n Total number of solo projects*: 95
u created by a designer/engineer: 47 u made by non professionals: 48
n Number of Jaga Product days ideas taken into production within 6 months: 6 *= Created by only one person
24/11/12 Wim Vanhaverbeke 55
Jaga products days
Example: Play radiator
24/11/12 Wim Vanhaverbeke 57
Example: The play radiator
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• Birth of an entire city BLACK ROCK CITY in the Black Rock Desert in Nevada
• 40.000 people
• a cross-pollination of art, music, theatre, sensation
• wonderful creations > go up in flames at the end of the 3 weeks
Open innovation #3 Uchronians and the Burning Man
www.uchronians.org
Start of the creative (internet) community QOD:Vamdrup - Denmark Founded 2000 Founders
• Søren Løgstrup (Sales and marketing) • Hans Erik Schmidt (Business development)
Quilts of Denmark: quilts & duvets with active temperature and humidity control The bedding textile industry
n Overview late ’90s u Very traditional industry without any
major innovation u Through the nineties there was a trend
towards falling prices (quality). u Price was the only dominating factor!
n QOD wanted to change this !
10
Changing the industry?
n Founders formulated two guidelines for the QOD business:
1. ”to promote a healthy sleep for a better tomorrow”
2. A dream team : only best people in the industry
Provider of healthy sleep n Vision:
u We are not a textile company. u We are providers of healthy sleep!
n Sleep is a major problem u We sleep less than we did 50 years ago u More than 70 million Americans do not sleep well (309 mill
inhabitants or 23% ) u The lack of sleep is costing the American society billions of
dollars annually. u It is estimated that 56.000 car accidents in the United States
happen because the driver falls asleep behind the wheel. u Danish teenagers sleep too little and have difficulties attending
early lectures.
How to improve sleep? n In order to become a provider of healthy sleep, QOD
needed to know which factors are important for a good night’s sleep:
n They started a cooperation with external experts: u Sleep scientists (Glostrup hospital) u Danish Asthma & Allergy Association u Physiotherapists
n Temperature (variation) rapidly emerged as one of the major determinants of a good / bad sleep
How to find the required technology? n Lot’s of trials with different technologies n H-E Schmidt reads an article in a scientific journal
about phase change technologies developed by Nasa n Contacts Nasa & Outlast
Phase change materials How to develop the required technology?
n Outlast was mainly interested in building material applications
n Gradually shifted attention towards textiles when it saw the economic opportunities while collaborating with QOD
n Outlast invented the microcapsules with PCMs n QOD optimized the technology (getting the right mix)
to have a better sleep u combining the insights of different fields
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How to deal with IP?
n Outlast licenses the technology to QOD u Worldwide and exclusive license for quilts & pillows u Sublicenses to other manufacturers in countries where QOD
is not active / interested u Outlasts licenses to other firms for other applications
t Shoes, jackets, underwear, etc… n Sublicenses lead to easy price erosion, insufficient
control, brand damage u Outlast deal: grow and internationalize fast – too many
sublicenses
More recent developments
n Both companies co-developed a new, stronger Temprakon. Launched autumn 2010 u QOD is now a world-wide producer minimizing the number
of sublicenses
n Need to educate the retail shops and final customer u Training of sales people in retailing shops in return for a
marketing budget. u Working on new concepts to reach the customer
• Airborn, Temprakon shops • Internet sales ? • How to experience the quilt’s effect before buying it?
Temprakon-Airborn concept More recent developments
n Both companies co-developed a new, stronger Temprakon. Launched autumn 2010 u QOD is now a world-wide producer minimizing the number
of sublicenses
n Need to educate the retail shops and final customer u Training of sales people in retailing shops in return for a
marketing budget. u Working on new concepts to reach the customer
• Airborn, Temprakon shops • Internet sales ? • How to experience the quilt’s effect before buying it?
Whats next: The launch of the new TempraKON?
n QOD developed with Outlast a new Temprakon u Better performance and moisture control
n How to launch it? Two basic options 1. Launch the new generation TempraKON within the whole
range of QODs products. u QOD can re-negotiate sublicenses and price settings with partners in
several countries u push previous licensees out of the market in countries where QOD wants
to sell its products directly to retailers.
2. Keep the old TempraKON and add on a second layer of premium products u Advantages? Size of premium market? Price sensitivity?
Open innovation in services: Example: Pet insurance! § Combining resources, knowledge and
databases of insurance company, pet food manufacturer
§ Collaboration between different partners § Bonding of clients in commodity like
markets § Cross industry innovation, § Relational capital / open innovation § Sustainable competitive advantage
§ Similar example: Yacht insurance
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OI in Services: KLM jet service § Value creation: improve time productivity of C-level
managers through jet service (vs. regular flights) § 3 - 4 clients instead of 1 – 2 per day
§ Set up the OI-value chain: § Internal innovation lab § European network of taxi’s § European network of low-cost, small airports § New technological applications increasing on flight
productivity
§ Value capture: how to maximize profitability? § Licensing in consecutive steps (KLM-Air France; Skyteam
world; all competitors (One World; Star alliance)
§ Move ahead: Include some of Netjets’ BM: time sharing!
How to manage OI?
An example: How to cooperate with high-tech
start-ups?
How to organize for OI? External Venturing at XYZ § Pitfall : Large firm invests in a start-up and uses its
financial participation as a power tool to enforce cooperation on terms of the investing company
Start-up
XYZ-BU XYZ-V
Is it an interesting investment? Yes? Then a minority participation
Once there is a financial participation there is no ex ante deal how to handle the transfer of technology!
How to organize for OI? External Venturing at DSM § Rationale:
§ Strategic return, not a financial return § One of the BU should benefit from it
§ Therefore: Negotiation is a three way negotiation There are two deals packaged into one
overall deal
Start-up
DSM-BU DSM-V
1. Option creation: Is it an interesting investment?
2. Option exercising: Can the new technology create a new business in the future?
How to organize for OI? External Venturing at DSM Six reasons not to start a power play with
external ventures: 1. Bad reputation: when the large, investing firm is looking
for interesting start-ups as a recurrent practice 2. Pushing too hard for a particular application (based on
the business model and proposed application of the large, investing firm)
u Market potential of start-up technologies is still very uncertain because of the early stage technology. Keep options open for unintended but interesting applications.
u limits business potential of start-up (and thereby shareholders value)
….
How to organize for OI? External Venturing at DSM Six reasons not to start a power play with
external ventures: 3. Might kill the spirit of good cooperation. 4. Kill entrepreneurial spirit by creating another "corporate
puppet on a string" 5. Could limit exit possibilities and exit value for other
shareholders (by lock-in to/dependency on corporate) 6. Could result in litigation if perceived as abuse of
economic power
13
Strategic use of IP in open innovation
Some non ICT-examples
License scheme of Bekaert & Continental (technical standards)
Bekaert Continental
Other clients
Other suppliers
Proposal: • X = …% of net sales value of supplied product • Supplier collects royalties • Cross-license agreement between client and supplier implying:
• Bekaert to supply "other clients" at X% • "Other suppliers" to supply the Continental at X% • Bekaert grants sublicenses to "other suppliers". The latter can supply to
"other clients" at 2X%
0%
x %
2x %
100% 100% 60%: compensation for licensing activities 40%
time
Long term – many options
short term applications
low high R&D expenditures
Know- ledge
Know- ledge focus
academic institutions
focus industrial actors
IMECs bridge function between academic institutions and industry
embryonic potential growth mature declining/ obsolete
Collaborative research Own Research
technology life cycle
potential
generic technology
application oriented
IP policy: IMEC’s position in the technology life cycle
IP policy: IMEC Industrial Affiliation Program
n What u R&D cooperation in generic technologies u Strategic program develop by IMEC and executed in IMEC u IIAP partners send guest researcher(s) to IMEC
n Advantages u Sharing costs, risks, research infrastructure, IP u IIAP partners get access to:
- IMEC’s background knowledge - selected results of other partners in IIAP
u bilateral contract within the framework of IIAP n Leverages
u resources u knowledge u cross-fertilization of research of different partners u shortening time to market
IIAP foreground knowledge
partner B
partner C
partner …
partner A
IMEC IIAP
background knowledge
knowledge developed within the program
common IP (R1 - R1*)
co-owned – non-exclusive license partner IP (R2) exclusive license
IMEC IP (Ro) non-exclusive
licensing
IP policy: IIAP – Generic framework
14
Technology markets and the role of innomediaries
OI and technology markets Inter-organizational knowledge transfers
u The Arrow (1962) “disclosure paradox”: market failures because inventors are reluctant to reveal their technology
u Patents provide opportunities for firms to overcome the disclosure problem t IP is important to trade innovations
u Markets for technology? (Arora et al (2001) t Still significant transaction costs in transferring
technologies t Selling technologies in the marketplace is not fully
leveraged (Gambardella, Giuri & Luzzi,; 2007) – the market for technology could be 70% larger.
Shifting roles and the emergence of (intermediate) technology markets
Running business
Developments in Science & Technology
Source: Adapted from Jos Put - DSM
Industrial Research
Shifting roles and the emergence of (intermediate) technology markets
Running business
Industrial Research
Developments in Science & Technology
Source: Adapted from Jos Put - DSM
• TTO • External CV • Public / private research institutes • OI campus: HTC, Chemelot, etc… • Markets for technology: Yet2.com, Innocentive, Ninesigma • OI services: IDEO, BIG, Indiegroup
Technology suppliers
Technology users
GrowingGap
OI and technology markets Role of innomediaries
u 2-sided markets (Rochet & Tirole (2005) Two-Sided Markets: A Progress Report; Eisenmann, Parker, and Van Alstyne (2006) Strategies for Two-Sided Markets, HBR)
u Innomediaries can clear the market more efficiently t Innocentive, Ninesigma, … t Yet2.com, Ocean Tomo t YourEncore
u Problem of quality of technology (garbage technology on the market) t High quality technology searched in embedded
networks u Why companies still have their own portals (P&G’s C
+D)
Restructuring companies as a silent driver of OI
Philips Natlab
R&D center Applied technologies
Running businesses
R&D OI campus Applied
technologies
Running businesses
• Downsizing • Other functions • Inbound OI • Lic & spin-offs • OI campus
• Profit center • Downsizing • Ext & int clients • Manage rel. with BU
• In-sourcing • Looser link with R&D and AT • Manage rel. with AT
15
OI Research: The next wave
Edited by: Henry Chesbrough, Wim Vanhaverbeke Joel West
2003
2006
2006 2008 2011
2013 2011
Exnovate as a network of excellence for OI-practitioners and scholars? n www.exnovate.org n An international network of excellence on Open and
Collaborative Innovation n Projects
u PhD course OI in ESADE (4th time – 7-9 Janaury Barcelona)
u CE and OI Masterclass (9 times already; 10th time at ESADE Barcelona June 2013)
u Study on open innovation metrics u Using best practices to improve OI in SMEs u Dispatching surveys about OI u …
http://www.exnovate.org/
