[Ip-health] (Economist) The love-in:The move toward open innovation is beginning to transform entire industries

[Thiru Balasubramaniam]

<SNIP>

IBM is another iconic firm that has jumped on the open-innovation
bandwagon. The once-secretive company has done a sharp U-turn and
embraced Linux, an open-source software language. IBM now gushes about
being part of the =93open-innovation community=94, yielding hundreds of
software patents to the =93creative commons=94 rather than registering them
for itself. However, it also continues to take out patents at a record
pace in other areas, such as advanced materials, and in the process
racks up some $1 billion a year in licensing fees.

Since an army of programmers around the world work on developing Linux
essentially at no cost, IBM now has an extremely cheap and robust
operating system. It makes money by providing its clients with services
that support the use of Linux=97and charging them for it. Using
open-source software saves IBM a whopping $400m a year, according to
Paul Horn, until recently the firm's head of research. The company is
so committed to openness that it now carries out occasional =93online jam
sessions=94 during which tens of thousands of its employees exchange
ideas in a mass form of brainstorming.

<SNIP>

For one thing, patents are becoming much less important nowadays than
brands and the speed at which products can be got to market. It is true
that some of the rising stars in developing economies are beginning to
take out more patents, but many of their innovations are still kept
quiet as trade secrets. So fluid are their markets, and so weak the
historical patent-protection in them, that bosses often prefer to keep
things in the dark=97and come up with the next innovation as necessary to
stay ahead of the competition.

----------------

http://www.economist.com/surveys/displaystory.cfm?story_id=3D9928227


INNOVATION

The love-in

Oct 11th 2007
 From The Economist print edition
The move toward open innovation is beginning to transform entire
industries

BERKELEY seems like a fitting place to find the godfather of the
open-innovation movement basking in glory. The Californian village was,
after all, at the very heart of the anti-establishment movement of the
1960s and has spawned plenty of radical thinkers. One of them, Henry
Chesbrough, a business professor at the University of California at
Berkeley, observes with a smile that =93this is the 40th anniversary of
the Summer of Love.=94

Mr Chesbrough's two books =93Open Innovation=94 and =93Open Business Models=
=94
have popularised the notion of looking for bright ideas outside of an
organisation. As the concept of open innovation has become ever more
fashionable, the corporate R&D lab has become decreasingly relevant.
Most ideas don't come from there (see chart 4).

To see why travel to Cincinnati, Ohio=97which is about as far removed
culturally from Berkeley as one can get in America. The conservative
mid-western city is home to P&G, historically one of the most
traditional firms in America. For decades, the company that brought the
world Ivory soap, Crest toothpaste and Ariel detergent had a closed
innovation process, centred around its own secretive R&D operations.

No longer. P&G has radically altered the way it comes up with new ideas
and products. It now welcomes and works with universities, suppliers
and outside inventors. It also offers them a share in the rewards. In
less than a decade, P&G has increased the proportion of new-product
ideas originating from outside of the firm from less than a fifth to
around half. That has boosted innovation and, says its boss, Mr Lafley,
is the main reason why P&G has been able to grow at 6% a year between
2001 and 2006, tripling annual profits to $8.6 billion. The company now
has a market capitalisation of over $200 billion.

IBM is another iconic firm that has jumped on the open-innovation
bandwagon. The once-secretive company has done a sharp U-turn and
embraced Linux, an open-source software language. IBM now gushes about
being part of the =93open-innovation community=94, yielding hundreds of
software patents to the =93creative commons=94 rather than registering them
for itself. However, it also continues to take out patents at a record
pace in other areas, such as advanced materials, and in the process
racks up some $1 billion a year in licensing fees.

Since an army of programmers around the world work on developing Linux
essentially at no cost, IBM now has an extremely cheap and robust
operating system. It makes money by providing its clients with services
that support the use of Linux=97and charging them for it. Using
open-source software saves IBM a whopping $400m a year, according to
Paul Horn, until recently the firm's head of research. The company is
so committed to openness that it now carries out occasional =93online jam
sessions=94 during which tens of thousands of its employees exchange
ideas in a mass form of brainstorming.

Mr Chesbrough, of course, heartily approves. He gives dozens of other
examples of firms doing similar things, ranging from Clorax, a
household products firm to Air Products, an industrial gases company.
Mr Chesbrough reckons that =93IBM and P&G have timed their shift to a
high-volume open-business model very well=94 and that if their
competitors do not do the same they will be in trouble.

Not everyone is impressed. Kenneth Morse, head of MIT's
Entrepreneurship Centre, scoffs at IBM's claim to be an open company:
=93They're open only in markets, like software, where they have fallen
behind. In hardware markets, where they have the lead, they are
extremely closed.=94
Open costs

David Gann and Linus Dahlander, of London's Imperial College, are also
sceptical. They argue that firms have always been open to some degree
and that the benefits differ depending on their line of business. Those
using older technologies, for instance, may benefit less. They also
point out that the costs of open innovation, in management distraction
or lost intellectual-property rights, are not nearly as well studied as
its putative benefits.

Yet another critique comes from capital-intensive industries, where
products take a long time to develop and remain on sale for years.
Toyota's Mr Reinert laughs when asked about open innovation. With the
billions of dollars his firm spends on research and on equipping its
factories=97not to mention a five-year product-development cycle=97he
suggests it would be foolish to open up and allow rivals to steal its
edge. =93Eventually even Google will have to make something tangible, and
when they do they will protect it=97just like Tesla Motors, which does
not have an open model,=94 he adds.

GE's Mr Immelt observes that his firm is a leader in a number of
fields, such as making jet engines and locomotives, which requires
=93doing things that almost nobody else in the world can do=94 and where
intellectual-property rights and a degree of secrecy still matter. Mark
Little, his head of research, is even more sceptical and says outside
ideas =93don't really stick well here=94. He professes great satisfaction
with the output of GE's own research laboratories. =93We're pretty happy
with the hand we've got,=94 he adds.

Horses for courses, perhaps. Boosters of open-innovation agree that
there are perils. One of them is that it is not easy to work with
outsiders. Corporate cultures can sometimes clash and some outsiders
are not used to working in a business environment. For example, P&G has
a =93co-invention=94 lab with BASF, a German chemicals giant with its own
strong corporate-culture. Boffins from the American government's
prestigious Los Alamos national laboratory also sit in on some of P&G's
research-planning sessions. The consumer products firm believes that
the benefits of working with people from such diverse organisations are
worth the effort.

For one thing, patents are becoming much less important nowadays than
brands and the speed at which products can be got to market. It is true
that some of the rising stars in developing economies are beginning to
take out more patents, but many of their innovations are still kept
quiet as trade secrets. So fluid are their markets, and so weak the
historical patent-protection in them, that bosses often prefer to keep
things in the dark=97and come up with the next innovation as necessary to
stay ahead of the competition.

Even in developed markets, the acceleration of innovation is making
patents less relevant. What is more, say brand experts at P&G (which
claims not even to count patents any longer), the dizzying pace of
change today confuses consumers with a baffling array of choices. Such
firms are increasingly turning to trusted brands to simplify things for
their customers. Andrew Herbert, head of Microsoft's research centre in
Cambridge, England, puts it this way: =93Our brand hides a tremendous
amount of innovation.=94

Open innovation also appears to keep corporate bureaucrats on their
toes, making companies better at competing. The combination of exciting
new technologies and juiced-up management processes has, according to
Mr Lafley, helped P&G to reduce its rate of failed product-launches
from eight out of ten to just half.

Unilever's David Duncan insists that his firm=97one of P&G's biggest
competitors=97is much better connected to its customers than it was.
=93Twelve years ago, when I joined, we were very closed, vertically
integrated and owned most of the value chain=97even the chemicals and
software we used,=94 he says. Now it is much more receptive to ideas and
services from the outside, even posting challenges on the internet for
people to come up with new ideas. But he too confesses that there can
be difficulties: =93it's like the first time you used Google; it was
scary and a bit tricky, but soon you see that it's great.=94

So how do you know if open innovation will work for a particular
company? It may well depend not just on what a company does but also on
how it is perceived in the market. Hal Sirkin, of the Boston Consulting
Group, suggests that rather than see firms like P&G and IBM as truly
open innovators, it is better to view them as =93beacons=94. They have
enough world-class experts working for them to attract outsiders who
have brilliant ideas. Such firms are =93open=94 in the sense that they are
now casting a very wide net in their search for ideas. However, once
they have captured the essence of those ideas, argues Mr Sirkin, =93they
control them and the process of getting them to market.=94
Illustration by Noma Bar
At your service

On a summer day in east London, a warehouse was taken over by a company
eager to make a splash. It was decked out to look like a cool New York
loft. The Ministry of Sound, a London nightclub, was hired for a party
afterwards. The event was packed with journalists. At last the stars
took to the stage=97a group of besuited Nokia executives there to
announce a dramatic change in corporate strategy.

Nokia, a Finnish company, makes mobile-phone handsets which are used by
nearly a billion people around the world. However, it now wants to be a
services firm. Why? Niklas Savander, of Nokia, argues that the
mobile-phone business =93is moving so rapidly, thanks to the
democratisation of the internet, that we must innovate or die.=94
Providing people with devices alone is not enough, the company has
concluded.

With half of the value and most of the innovation in a mobile-phone
handset now made up of software, =93the leap to services is not so great
as it seems,=94 he adds. Nokia is now rolling out Ovi, a branded service
offering users networked gaming, music downloads and other services
from their handsets.

Visionary companies need to do even more than that, argues a report by
C.K. Prahalad and Venkataram Ramaswamy, two academics at the University
of Michigan. They think firms should cultivate a network that includes
consumers in which =93personalised, evolvable experiences are the goal,
and products and services evolve as a means to that end.=94 That sounds
fluffy enough to have come straight from the Summer of Love.

Yet despite the dangers, some companies have successfully brought
consumers and others into the innovation process. Lego, the Danish
maker of children's building blocks did it; and it helped revive the
company. Influenced by research done at MIT on how children learn, Lego
launched Mindstorms, a robotics kit that allows people to design their
own robots and other devices. Numerous websites have popped up as
users=97including many adults=97come up with all sorts of ways of putting
together the kit to make things ranging from intruder alarms, sorting
machines and even the controls for small unmanned aircraft.

Eric Von Hippel, of MIT, has long advocated user-driven innovation. He
says you can see it all around you. Users who feel passionate about
certain products often fiddle around with them because they fail to
provide exactly what they want. It might be a mountain bike, a kayak or
even a car. He reckons open innovation misses the point if it is not
inspired by users, because companies are then =93just talking about a
market for intellectual property rights, it's still the old model.=94

Mr Von Hippel thinks that firms that are close to their lead users can
come up with much better designs for new products and get them to
market faster. This advice appears to contradict what Harvard's Mr
Christensen says, but in fact the two theses are compatible. Mr
Christensen's point is that firms should not uncritically cater to the
demands of their most profitable current customers. They must question
those demands or they could end up doing little more than gold-plating
their current offerings; like Mr Von Hippel, he thinks firms should
keep a closer watch on new and dissatisfied users, who are much more
likely to be the source of disruptive ideas.
Invented on Facebook

Mr Von Hippel adds that networks of hyper-critical users can even help
firms quickly filter out bad ideas and thus encourage the process of
fast failing. The craze for social networking sites, like Facebook and
MySpace, could be useful. Sinan Aral, of the Stern business school at
New York University, argues that how people relate to the products they
use (something often discussed on such sites) reveals a social
structure and preferences. That can help firms understand more about
their customers and how to market products more effectively.

User networks operate in many businesses. OnStar, a mobile-information
system widely launched by GM in 2000, was initially meant only to
provide safety and emergency services for drivers. But motorists wanted
it to do more, and they pushed GM to innovate. Now OnStar can check if
a car is working properly, open the doors for a driver who accidentally
locks the keys inside and even locate the nearest pizza place. GM's
Larry Burns believes OnStar helps to improve his firm's brand loyalty
because it keeps the company in constant touch with its customers.

Richard Lyons, of Goldman Sachs, offers the most compelling argument
for firms to think hard about recruiting users to speed up and improve
their innovation efforts. In rich countries about four-fifths of
economic activity now involves services, but profit margins are
eroding. He argues in a new paper that =93commoditisation often occurs
even faster in services than in physical products=94, because innovations
are easier to copy, patents can provide less protection, up-front costs
are lower and product cycles are shorter.

For a business that uses open and networked innovation, it matters less
where ideas are invented. Managers need to focus on extracting value
from ideas, wherever they come from. Unfortunately government planners,
who are often obsessed with national innovation policies and the need
to create clusters like Silicon Valley, have not learnt this lesson.
History also shows that countries that come up with new technologies
are often not the ones that commercialise or popularise those
inventions. Richard Halkett, of Nesta, a British research body devoted
to innovation policy, jokes that the right policy for governments
should be =93never invented here=94. He may be right.


---------------------------------
Thiru Balasubramaniam
Geneva Representative
Knowledge Ecology International (KEI)
voice +41.22.791.6727
fax +41.22.723.2988
mobile +41 76 508 0997
thiru@keionline.org