Reinventing
R&D Through Open Innovation
By Henry Chesbrough
Old-school R&D was strictly in-house. The
new model for success requires collaboration with many innovators.
Since
the days of Thomas Edison’s Invention Factory, new product innovation has been
the engine of long-term growth and a buffer in times of economic weakness for
world-class companies. Yet even respected research powerhouses like British
Telecom, Siemens, and Fujitsu are today finding it more difficult to make their
innovation investments pay. There is too much piling up on the shelf, and there
are too few breakthroughs that lead to new markets and higher growth. In short,
R&D labs once prized for their independence and proprietary research find
they’re having a terrible time extracting value from their own work.
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“Open innovation
draws on technologies from networks of universities, startups,
suppliers, and even competitors.” |
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To
increase the return on their R&D, successful innovators are finding they
must complement their in-house R&D with external technologies, and offer up
their own technologies to outsiders. R&D at large companies is shifting
from its traditional inward focus to more outward-looking management — open
innovation — that draws on technologies from networks of universities,
startups, suppliers, and competitors.
The
New R&D
Until recently, private R&D labs wouldn’t have dared try open
innovation; R&D was viewed as a vital strategic asset, and, in many
industries, a barrier to competitive entry. Research leaders like DuPont,
Merck, IBM, GE, and AT&T did the most research in their respective
industries — and earned the most profits as well.
The
change is striking. Most of the premier industrial research laboratories of the
20th century have retreated from their historic mission of independent
scientific discovery because of the low yields they’re experiencing. According
to Forbes magazine, the last household-name product launched by
DuPont’s 100-year-old Experimental Station (dubbed the Ex Station) laboratory,
which created products used to make everything from leisure suits to parts that
protect NASA spacecraft, was Stainmaster fabric protection — in 1986.
Slowing
innovation from within large companies doesn’t mean internal R&D should be
dismantled; it’s not a question of “make or buy.” However, the open innovation
approach poses new management demands. For one thing, companies need to think
differently about how opening labs to outsiders can create opportunities
for technology exchanges that lead to revenue. Internal R&D produces
intellectual property that other companies in the web of open innovation may
covet. IBM earned $1.9 billion revenue in 2001 from patent licensing and
royalties on its software, chips, and systems, for example.
The
perspective of internal R&D must also change from depth
to breadth and integration. Whereas old-school research labs developed new
technologies from basic science to finished product, open innovation labs need
to develop technologies that embrace and extend existing intellectual property
— even those that are “not invented here.”
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“Automobile
manufacturers don’t try to reinvent the wheel; they partner with suppliers
and research organizations to stay on top of such new technologies.” |
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DuPont
now partners with biotechnology firms to develop such products as
Embracing
Opportunities
Industries that have been slower to catch on to open innovation
should take these leaders’ cues. Large toy manufacturers, for example, complain
that they are in a mature business, with low growth in overall toy sales. But
they overlook the fact that breakthrough toys still hit the shelves. Many
of these blockbusters have come from smaller shops, rather than the large toy
companies. Why? The big toymakers constrain their search by insisting that any
new toy bring in $100 million or more in its first year. Even such leading toys
as Barbie and Hot Wheels would have failed to bring in a comparable amount when
they were introduced in 1959 and 1969, respectively. An insistence on large
initial sales condemns the toy manufacturers to merely extending existing brand
franchises, or acquiring at a high price new toys successfully launched by
smaller innovators.
Contrast
that process with the one followed by video-game developers, which routinely
look outside for ideas. Some successful games are based on popular brands, such
as John Madden Football or Star Wars. Developers hunt for hot properties to
license and turn into new games. Other successful titles, such as the Grand
Theft Auto series, were coded by small groups of developers (such as
Rockstar Games). These titles were later acquired by larger companies
(such as Take-Two Interactive Software Inc.) that could provide
distribution and marketing.
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“Any company
spending 5 percent of sales on R&D and seeking higher revenue growth
would likely benefit from shifting to open innovation.” |
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As
the toy industry illustrates, the principle of open innovation isn’t limited to
high-tech industries. In fact, any company spending 5 percent of sales on
R&D and looking to get higher revenue growth would likely benefit from
shifting its R&D to a more open stance.
But
the key to change isn’t simply finding partners; it is embracing a management
philosophy that reorients an enterprise’s innovation activities away from the
search for “
Resources
“Here
Comes Hyperinnovation” by Michael Schrage, s+b, 1Q 2001; Click here.
“Adventures
in Corporate Venturing,” by Jill Albrinck, Jennifer Hornery, David Kletter,
and Gary Neilson, s+b, 1Q 2001; Click here.
“The
Cluster Effect: Can Europe Clone Silicon Valley?” by Des Dearlove, s+b, 3Q 2001; Click here.
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Henry
Chesbrough,
henry@chesbrough.com
Henry Chesbrough is an assistant professor and the Class of 1961
Fellow at the