Open Innovation: Open up the fortresses of knowledge!
Corporate culture | Digitization and Industry 4.0 | future of production | innovation | Knowledge is now more widely distributed, and innovation is happening more often in small companies. For the visionary Henry Chesbrough, this means the future clearly belongs to open innovation.
A spring day in Essen: thyssenkrupp experts are discussing new approaches in research and development. With them is the US economist Henry Chesbrough, who introduced the model of open innovation in 2003. In this interview, he explains why companies will have to do more in the future to open themselves up.
Ideas have to flow – this is the credo of the US economist Henry Chesbrough. The advocate for “Open Innovation” fights for free knowledge exchange and the close cooperation of corporates with external thinkers.
What does “open innovation” mean, and what is new about it?
For a long time, the innovation process at big companies looked like a funnel. Many projects that were started by the research department went in at the top. Some of them were abandoned after a while, and others went on to the narrow part of the funnel – the development department – and at some point reached the market. This was all a closed system. Innovations came only from the company’s own R&D department, and they were also placed only in their traditional markets. Open innovation means breaking with his principle and making the funnel permeable, so that ideas can flow more easily – into the company from outside and vice-versa. I published my first book about the concept of open innovation in 2003. From this, you can see that it is not a new idea. However, open innovation is gaining in importance, thanks mainly to the growth in digitization.
Why is this form of innovation better?
Because the large R&D departments of major groups, the old fortresses of knowledge, are losing a lot of their importance. This can be seen in the overall distribution of R&D spending. In 1981, large companies with more than 25,000 staff accounted for 70 percent of that spending. By comparison, small firms were rather insignificant at that time. However, this situation has altered radically. Today, the share of R&D spending accounted for by major groups is only 35 percent – half what it used to be – while small companies with fewer than 1,000 employees have a 22-percent share. We have a much more level playing field. Innovation today depends much less on a company’s size.
“Innovation occurs more often outside of major companies.”
Why have small firms become more inventive?
First, technologies like the internet have made it much easier to access knowledge. Second, young firms now have much more venture capital at their disposal. In addition, universities have established much closer relationships with business in recent decades. More and more research is happening through cooperation arrangements between industry and academia. People like me, who come from industry, have found a home in the academic world. This would not have been possible 30 years ago. All these developments are contributing to a situation where knowledge is distributed more widely and innovation occurs more often outside of major companies. Look at the US pharmaceutical company Merck. Its R&D department conducts around one percent of all biomedical research. No single company, however large it may be, can dominate this field alone. For this reason, the management recently announced in a letter to shareholders that it planned to do even more to open up to outsiders, so that the company could tap into the remaining 99 percent of research. Bill Joy, the founder of Sun Microsystems, once summed it up in this way: “Not all the smart people work for you.” In other words, we need to find a way to get better at connecting our smart people with smart people in other places.
How can a company find these smart people and their ideas?
Some companies now employ people known as technology scouts, meaning specialists who focus exclusively on tapping external sources of knowledge. For example, they read academic journals and keep their eyes open for interesting breakthroughs or maintain contact with renowned researchers. They also look at patent applications to find new and unusual ideas. In addition, many companies are intensifying their contacts with the startup scene, because this is where the business models and technologies of the future are increasingly emerging. One way to get there is to create a digital lab, where internal R&D staff are brought together with young companies to experiment together. This, too, is a good means of driving open innovation forward.
But is it not legally complicated to use ideas from outside?
Intellectual property is certainly a major topic. Issues such as which idea belongs to whom and who has access to it have to be clarified. This requires new processes. Also, to be honest, it is especially hard to resolve intellectual property issues in the initial phase. However, a few rules have now been established. Let me give you one example. Assume thyssenkrupp develops a new technology with a startup. There could then be an agreement that the senior partner receives the exclusive right to use the innovation in automobile construction, while the startup can sell it in the medical sector or the insurance industry.
Opening up has many advantages
You stress that open innovation also works from within a company to the outside world. How does that happen?
Remember the funnel model. Many projects that start in a company’s research department never reach the market. Open innovation means offering such projects to external partners or refining them with them. In addition, it can be worthwhile to share your own resources with others, as Amazon does. The company operates huge data centers to run its e-commerce business. Those centers are fully utilized in the run-up to Christmas, but certainly not during the rest of the year. For this reason, Amazon has started making its IT infrastructure available to other companies. In some cases, Amazon even hosts its rivals’ websites! By opening itself up in this way, the company gains two advantages. First, the fixed costs of the IT are spread over more users. Second, the organization is able to see huge volumes of data, from which it can learn. I could also imagine something similar happening at thyssenkrupp. It may be worthwhile to share your own data with other companies in order to gain access to their data in return. This digital raw material could be used to improve your own software and algorithms, as this is precisely what is becoming more and more important: data is increasingly forming the foundation for innovations, especially in the age of artificial intelligence.
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Does this mean open innovation is only for large groups?
No. German companies of all sizes have many patents. One approach could be to share with third parties proprietary technologies that you are not using yourself. Diversified companies like thyssenkrupp can also use open innovation within their group by exchanging ideas and cooperating across business areas. Their structure makes them virtually predestined to do this.
More and more often, we read about companies that are again doing everything on their own, like the automobile manufacturer Tesla. Does this not run counter to the idea of open innovation?
You have to look closely at what is happening here. Tesla and other companies that are seeking to build self-driving automobiles are focusing on what is known as the end-to-end experience. In other words, they are trying to produce all the knowledge about autonomous driving in-house. Especially in a field where safety plays such a big part, this makes sense. In other business sectors, however, Tesla operates in an extremely open manner. For example, the giant battery factory that is currently being created in Nevada is being built in collaboration with Panasonic, because Tesla knows that the entire capacity will not be used up by automobile batteries alone. In this business area, therefore, they are practicing open innovation.
Does open innovation work in all sectors?
There are certainly industries where open innovation is not so well suited. I could cite nuclear power as an example. This is a sector that does not have either a lot of startups operating or much university research going on. This makes a poor foundation because, for open innovation to work, there needs to be enough knowledge present that can then flow. However, whether a company opens itself up also depends ultimately on its culture and an ecosystem of suitable partners. Apple, for example, makes considerable use of external research capacity and invests only five percent of its turnover in its own R&D – at Microsoft the figure is 15 percent.
Will the open innovation model prevail? This is already happening. I introduced it in 2003, and it has developed into the leading innovation model in industry. Its advantages seem to justify it. This also applies to cooperation arrangements per se – open innovation makes sense only if it results in advantages for both parties.
About Henry Chesbrough
“I used to sell hard drives.” This is how Henry Chesbrough describes his previous life, with a wink. In reality, the well-known American economist can look back on long experience in industry. In the 1980s he worked at the Quantum Corporation, a US hardware manufacturer, with responsibilities that included business development. In 1997 he moved to the academic world, becoming Assistant Professor at the Harvard Business School. In 2003 he presented the book that made his name: “Open Innovation: The New Imperative for Creating and Profiting from Technology.” In it Chesbrough describes how companies can gain an edge in innovation by opening up systematically to outsiders. Chesbrough, 61, now teaches at the Haas School of Business, which is part of the renowned University of California, Berkeley.