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© 2006 Henry Chesbrough 1 Open Innovation and Open Business Models: A new approach to industrial innovation Presentation to Joint OECD/ Dutch Ministry of Economic Affairs Conference on “Globalization and Open Innovation” Dec. 6, 2006 Henry Chesbrough Haas School of Business UC Berkeley

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Page 1: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 1

Open Innovation and Open Business Models:

A new approach to industrial innovation

Presentation to Joint OECD/Dutch Ministry of Economic Affairs

Conference on “Globalization and Open Innovation”

Dec. 6, 2006Henry Chesbrough

Haas School of BusinessUC Berkeley

Page 2: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 2

Agenda

• Open Innovation• Open Business Models• Implications for Managing IP• Policy Implications

Page 3: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 3

The Current Paradigm: A Closed Innovation System

ResearchResearchInvestigationsInvestigations

DevelopmentDevelopment New ProductsNew Products/Services/Services

TheMarket

Science&

TechnologyBase

R D

Page 4: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 4

CurrentMarket

InternalTechnology

Base

R D

The Open Innovation Paradigm

Technology Insourcing

New Market

Technology Spin-offs

ExternalTechnology

Base

Other Firm’s MarketLicensing

Page 5: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

5 C 2002 Henry Chesbrough EIRMA SIG III, 2005-10-20

Robert Kirscbaum, DSM: Research & Technology management, July – August 2005

License in

Spin in

Acquire

DivestSpin out

License out

“The creation of new businesses is a highly dynamic process, best represented as a horizontal funnel” (passed in iterative steps)

Open innovation in practise

Page 6: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

6 C 2002 Henry Chesbrough EIRMA SIG III, 2005-10-20

Closed innovation

Our currentmarket

Our new market

Other firm´smarket

Open innovation

External technology insourcing

Internaltechnology base

External technology base

Stolen with pride from Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from Industrial R&D, 10th Annual Innovation Convergence, Minneapolis Sept 27, 2004

Internal/external venture handling

Licence, spin out, divest

Page 7: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 7

CurrentMarket

InternalTechnology

Base

R D

IBM & Open Innovation

Technology Insourcing

New Market

ExternalTechnology

Base

Other Firm’s Market

Java,Linux

Sun, and others’ eqmt

$1.9 B licensing,OEM for semi co’sODM for others

Global Svcs

Page 8: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 8

CurrentMarket

R D

Is this just for High Tech?Procter &Gamble

New Market

“Use it or Lose it”

ExternalTechnology

Base

Other Firm’s Market

TechnologyScouts

InternalTechnology

Base

VentureAcquisitions“Spinbrush”

LargeAcquisitions“Gillette”

Page 9: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 9

The Logic of “Open Innovation”

• Good ideas are widely distributed today. No one has a monopoly on useful knowledge anymore.

• Innovation is now done within networks of firms, rather than within a single firm

• Not all of the smart people in the world work for us.

Page 10: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 10

Agenda

• Open InnovationOpen Business Models

• Implications for Managing IP• Policy Implications

Page 11: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 11

Which Would You Rather Have?

• A Better Technology

Or,

• A Better Business Model

Page 12: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 12

Go with the Business Model

• Business Model > Technology– Ability to profit from technology– Ability to scale technology– Ability to continue innovating technology– Ability to acquire technology

Page 13: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 13

IBM: Its Closed Value ChainV

alue

-Add

ed A

ctiv

ities

Materials

Chips, devices

Computers

Operating Systems

Applications

Productivity SW

Atoms

Solutions

Value Chain

All IBM – pre 1993

Page 14: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 14

IBM’s Open Business ModelV

alue

-Add

ed A

ctiv

ities

Materials

Chips, devices

Computers

Operating Systems

Applications

Productivity SW

IBM Chain OEM Market

Materials

Chips, devices

Computers

Operating Systems

Applications

Productivity SW

Integration

Atoms

Solutions Other Integrators

Page 15: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 15

IBM’s Open Source Business Model

• Spends about $100M each year on Linux– 50% for general improvement– 50% for specific improvements for IBM gear

• Others spend another $800M a year • IBM creates value through Linux

– Also donates development tools, patents• IBM captures value through value-added

services and software “up the stack”

Page 16: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 16

Agenda

• Open Innovation• Open Business Models

Implications for Managing IP• Policy Implications

Page 17: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 17

The Role of IP in the Business Model

• A business model has two functions:1. Value creation2. Value capture

• IP is critical for value capture in many business models

• IP can also be valuable in creating value– Setting standards– Intellectual commons– Defining the space for the innovations of others

Page 18: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 18

Fig. 4.1Evaluating Technology Alignment with Patent Coverage

Patent Coverage

Technology Coverage

UnusedProtectionRegion

ProtectedRegion

Unprotected UseRegion

Party 1

Page 19: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 19

Fig. 4.2Complex Technology Alignment with Patent Coverage,

when Two Parties Have Conflicting Claims

Patent Coverage

Technology Coverage

Party 1

Patent Coverage

Technology Coverage

Party 2AssertionRegion

ImpairedRegion

InfringementRegion

Page 20: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 20

Fig. 4.3Complex Technology Alignment with Patent Coverage,

when Second Party does not Practice Technology

Patent Coverage

Technology Coverage

Party 1

Patent Coverage

Party 2Now Irrelevant AssertionRegion New Infringement

Region

InfringementRegion

Page 21: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 21

Fig. 4.5IP Mapping Value Chain Analysis: Printers

Controllers

Print Heads

Lasers

Sensors

Repair and ServiceEquipment Installation Consumables Operation

Enabling Technology

Manufacturing

Integration

Site Prep

Assembly

Ink

Paper

Testing

Connectivity

Programming

Monitoring

Quality Control

Scheduling

Diagnostics

Testing

Procedures

Parts

= Moderate IP risk

= Strong IP position (possible assertion opportunity)

= High IP risk

= Low IP risk

Page 22: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 22

The IP Management Life Cycle

Stages in the Technology Life Cycle

Emerging

Growth

Maturity

Decline

Time

Perfor

man

ce

Figure 4.6

Become the standard

Compete withinthe standard

Grow thestandard

Harvestthe standard

Page 23: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 23

Managing IP for MS Windows

Mature market in USWindows has won the war to be the standard So strongly enforce copyright to prevent piracyEvery illegal copy of Windows is money lost

Growing market in ChinaWindows and Linux still battlingSo do NOT enforce copyright (not yet)Every illegal copy of Windows is one less for Linux

IP Management Must be Driven by the Business Model

Page 24: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 24

The IP Management Life Cycle

Stages in the Technology Life Cycle

Emerging

Growth

Maturity

Decline

Time

Perfor

man

ce

Figure 4.6

China

US

Become the standard

Compete withinthe standard

Grow thestandard

Harvestthe standard

Page 25: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

C 2002 Henry Chesbrough 25

Example of recorded reassignment:

“Intellectual Ventures LLC, a technology development and licensing start-up formed by Microsoft veterans Nathan Myhrvold and Edward Jung, has won the bidding for General Magic Inc's portfolio of patents and other intellectual property, paying $300,000.”(Wall Street Journal, May 29, 2003)

REASSIGNMENT INFORMATION

Date Recorded: July, 25 2003Assignor: General Magic Inc. (Date signed 04/23/2003)Assignee: Intellectual Ventures Patent HoldingReassignment Kind: Assignment of Assignor InterestNumber of Patents reassigned: 20

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© 2006 Henry Chesbrough 26

USPTO Patent Reassignment DataPatent Reassignments - 1980-2003

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

RY

=200

3

RY

=200

2

RY

=200

1

RY

=200

0

RY

=199

9

RY

=199

8

RY

=199

7

RY

=199

6

RY

=199

5

RY

=199

4

RY

=199

3

RY

=199

2

RY

=199

1

RY

=199

0

RY

=198

9

RY

=198

8

RY

=198

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=198

6

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=198

5

RY

=198

4

RY

=198

3

RY

=198

2

RY

=198

1

RY

=198

0

• Rising faster than base of patents itself, from 0.1% to 4.0%

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C 2002 Henry Chesbrough 27

Main Reassignment Kinds• Assignment (of assignors interest)• Security agreement/termination

• Government interest assignment• Executive order 9424, confirmatory license• Merger• Change of Name• “Other”

• From the examination of semiconductor class:– Change of Address– License– Confirmatory license– Conveyance of patent & trademarks– Correction to an error in the patent number– Release by secured party– Release of security interest in patents and tradem– Release of security interests– Security interest– Termination and release of assignment of security– Transfer by operation of law– Amended and restated patent and security agreement and mortgage

Offered as an option in thePTO 1595 form

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C 2002 Henry Chesbrough 28

Reassignments in Semiconductors (H01L): 2003

Affiliated Co61%

License1%

Merging2%

Other6%

Securitization23%

Ind. Inventors1%

Impure & Autonomous

3%

Pure & Autonomous

3%

Page 29: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

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Security: US 5149397

• Two reassignments for this patent:Reassignment KindAssigneeAssignorDate

Security InterestJPMorgan Chase BankXerox06/25/2003

Security InterestBank OneXerox06/21/2002

Patent: “Fabrication methods for micromechanical elements”, originally assigned to Xerox corporation. Application date: 1991.07.03. Date issued: 1992.09.22

Page 30: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 30

What’s Going On?

• “Your findings are consistent with what I have seen. That is, I have seen more security interests being taken in a company's patent rights (typically to collateralize debt). ”

• The beginnings of a secondary market for IP.

Page 31: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 31

IP Secondary Markets in the Future

• Orphan recovery programs• Failed Startup IP auctions• “Use It or Lose It” corporate policies• Bounties and Finders’ Fees• Sale-Leaseback programs• Patent roll-up strategies• Patent commons areas

Page 32: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 32

Agenda

• Open Innovation• Open Business Models• Implications for Managing IP

Policy Implications

Page 33: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 33

Policy Implications

• Case Study: US economic malaise in the 1980s– Auto’s– Steel– Consumer electronics– Shipbuilding– semiconductors

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© 2006 Henry Chesbrough 34

US Resurgence in the 1990s

• New companies, new industries– PCs, networking, software– Internet– Biotechnology– New kinds of semiconductors

• Note that the troubled firms in the troubled industries did not improve much

Page 35: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 35

Closed v. Open Policies

• Focus on expanding domestic market

• Protect local champions from foreign competition

• Subsidize largest domestic firms

• Limit foreign students and foreign direct investment

• Focus on SMEs• Focus on universities• Focus on IP policies• Stimulate greater

competition among largest firms

• Stimulate greater information exchange and coordination

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© 2006 Henry Chesbrough 36

Getting the Institutions Right

• Public research funding– The foundation of the innovation system– Focus on excellence, meritocratic award criteria

• IP– Clear, effective, but limited protection

• Universities– Meritocracy in research funding– Allow professors to engage with industry– Compete for “best and brightest” students– Enable research to move into industry

Page 37: Open Innovation and Open Business Models: A new · PDF fileOpen Innovation and Open Business Models: A new approach to industrial innovation ... • A business model has two functions:

© 2006 Henry Chesbrough 37

The Challenge of Indirect Policies

• No clear constituency• Time delay from policy change to results• Interaction among institutional factors, not a

single factor solution• We underestimated strength of US innovation

system in 1980s– We may be underestimating its weaknesses today

• Note that Japan has regained ground, with a very different institutional structure than US

• Note that OECD estimates China’s R&D > Japan

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