Open Innovation http://www.youtube.com/watch?v=JE64nCAT7FQ

1. Welcome to 42629
Open vs Closed Innovation
Thomas J. Howard
thow@mek.dtu.dk
Unless otherwise stated, this material is under a Creative
Commons 3.0 Attribution–Share-Alike licence and can be
freely modified, used and redistributed but only under the
same licence and if including the following statement:
“Original material by Thomas J. Howard for course 42629 – Innovation and Product Development
Department of Mechanical Engineering, The Technical University of Denmark”

2. Agenda
08:30 – Open vs Closed Innovation
09:00 – Break and discussion
09:15 – Crowd Sourcing
09:45 – Exercise
10:00 – Break and discussion
10:15 – Product/Service-Systems (PSS)
10:45 – Exercise
11:00 – Break and discussion
11:15 – Open Design
11:45 – Exercise
2 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

3. What is Open Innovation ?
3 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

4. Open Design:
The Oxford English Dictionary
The Oxford English Dictionary – 1st Edition
http://www.manhattanrarebooks-literature.com/oed.htm
“Box of quotation slips” by Owen McKnight, CC BY-SA 2.0
4 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

5. Open Innovation
“A paradigm that assumes that firms can
and should use external ideas as well as
internal ideas, and internal and external
paths to market, as the firms look to
advance their technology”
(Chesbrough H. W., 2003).
5 © 2007 Henry Chesbrough 2012

6. The Power of Open Innovation
Concrete Issues (Issue 1/11) - http://www.concreteissues.com/cartoons
6 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

7. Why Opening Up is Difficult
7 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

8. Game Theory: The Prisoner’s Dilemma
• Two robbers enter a house
8 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

9. Game Theory: The Prisoner’s Dilemma
• Two robbers enter a house
• Police catch them
• Due to a lack of evidence they can only be charged
with trespassing (skudt og dræbt)
9 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

10. Game Theory: The Prisoner’s Dilemma
• Two robbers enter a house
• Police catch them
• Due to a lack of evidence they can only be charged
with trespassing (skudt og dræbt)
They are then given the offer that:
• If both remain silent they get 1yr each
• If both confess they get 5 yrs each
• But if one confesses and the other doesn’t,
the confessor gets 0 years and the other
gets 20 years
What should the prisoner A do?
10 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

11. Game Theory: The Prisoner’s Dilemma
• Two robbers enter a house
• Police catch them
• Due to a lack of evidence they can only be charged
with trespassing (skudt og dræbt)
They are then given the offer that:
• If both remain silent they get 1yr each
• If both confess they get 5 yrs each
• But if one confesses and the other doesn’t
the confessor gets 0 years and the other -5, -5 -20, 0
gets 20 years
What should the prisoner A do?
0, -20 -1, -1
11 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

12. Opening up is difficult
Conservative industries consider
Knowledge as power to be held tightly
Most stakeholders are
slaves to the prisoners’
dilemma and therefore -5, -5 -20, 0
reach suboptimal
solutions
0, -20 -1, -1
12 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

13. Activities of Open Innovation
Exploitation:
• Venturing: Starting up new organisations drawing on
internal knowledge, and possibly also with finance, human
capital and other support services from your enterprise.
• Outward IP licensing: Selling or offering licenses or
royalty agreements to other organizations to better profit
from your intellectual property, such as
patents, copyrights or trade marks.
• Employee involvement: Leveraging the knowledge and
initiatives of employees who are not involved in R&D, for
example by taking up suggestions, exempting them to
implement ideas, or creating autonomous teams to realize
innovations.
VAN DE VRANDE, V., DE JONG, J.P.J., VANHAVERBEKE, W. and DE ROCHEMONT, M., 2009. Open innovation in SMEs: Trends, motives and
management challenges. Technovation, 29(6-7), pp. 423-437.
13 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

14. Indicators of Openness
Exploration:
• Customer involvement: Directly involving customers in
your innovation processes, for example by active market
research to check their needs, or by developing products
based on customers’ specifications or modifications of
products similar like yours.
• External networking: Drawing on or collaborating with
external network partners to support innovation
processes, for example for external knowledge or human
capital.
• External participation: Equity investments in new or
established enterprises in order to gain access to their
knowledge or to obtain others synergies.
VAN DE VRANDE, V., DE JONG, J.P.J., VANHAVERBEKE, W. and DE ROCHEMONT, M., 2009. Open innovation in SMEs: Trends, motives and
management challenges. Technovation, 29(6-7), pp. 423-437.
14 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

15. Indicators of Openness
Exploration:
• Outsourcing R&D: Buying R&D services from other
organizations, such as universities, public research
organizations, commercial engineers or suppliers.
• Inward IP licensing: Buying or using intellectual
property, such as patents, copyrights or trade marks, of
other organizations to benefit from external knowledge.
VAN DE VRANDE, V., DE JONG, J.P.J., VANHAVERBEKE, W. and DE ROCHEMONT, M., 2009. Open innovation in SMEs: Trends, motives and
management challenges. Technovation, 29(6-7), pp. 423-437.
15 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

16. Open vs. closed innovation
Closed Innovation – the lab is our world Open Innovation – the world is our lab
Hire the best and the smartest Recognize that lots of smart people work
elsewhere, so find ways to interface with
them
Put them in special conditions Open your networks to diverse talents
Innovators are free from market Innovators are exposed to real world
pressures to innovate from within needs, pressures and information
exchange to innovate by engagement
Very pushy - move technology pipeline Push and Pull - non-linear process of
from ideas to products ideation advances products and services
Delivered to passive customers Delivered to engaged customers
16 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

17. The Current Paradigm:
A Closed Innovation System
Science
& The
Technology Market
Base
Research Development New Products
Investigations & Services
R D&E
17 © 2007 Henry Chesbrough 2012

18. Great Successes from the
Closed Innovation Model
• The Chemicals Industry – Germany and later US
• Edison, GE, and the rise of electrification
• Rockefeller and Standard Oil
• World War II scientific achievements
• Chandler: Internal R&D key to the rise of the modern
US corporation in 20th century
18 © 2007 Henry Chesbrough 2012

19. Rising Costs of R&D
Then (25 years ago) Now
•<$ 50 million for a •> $ 800 million for
new drug a new drug
•< $ 10 million for a •> $50 million for a
new consumer new consumer
product product
19 © 2007 Henry Chesbrough 2012

20. Diminishing Economies of Scale:
US Industrial R&D by Size of Enterprise
Company Size 1981 1989 1999 2003
< 1000 employees 4.4% 9.2% 22.5% 22.5%
1,000 – 4,999 6.1% 7.6 % 13.6% 14.8%
5,000 – 9,999 5.8% 5.5% 9.0% 7.5%
10,000 – 24,999 13.1% 10.0% 13.6% 13.4%
25,000 + 70.7% 67.7% 41.3% 40.9%
Sources: National Science Foundation, Science Resource
Studies, Survey of Industrial Research
Development, 1991, 1999, 2001, 2003.
20 © 2007 Henry Chesbrough 2012

21. Open innovation
Closed innovation
Other firm´s
market
Licence, spin Our new
out, divest market
Internal
technology base
Internal/external Our current
venture handling market
External technology
insourcing
External technology base
21 Stolen with pride from Prof Henry ChesbroughHenry Chesbrough
© 2007 UC Berkeley, Open Innovation: Renewing Growth 2012
from Industrial R&D, 10th Annual Innovation Convergence, Minneapolis Sept 27, 2004

22. The Division of Innovation Labor
•Open Innovation separates innovation
into multiple stages
–From a marathon to a relay race
•Lab and Test Equipment are Fundamental
to this division of labour
–Customer’s ability to verify that spec
–Supplier’s confidence that good product was
delivered
–Enables the innovation baton to be passed
efficiently and effectively
22 Stolen with pride from Prof Henry ChesbroughHenry Chesbrough
© 2007 UC Berkeley, Open Innovation: Renewing Growth 2012
from Industrial R&D, 10th Annual Innovation Convergence, Minneapolis Sept 27, 2004

23. IBM’s Closed Value Chain
All IBM – pre 1993
Solutions
Value-Added Activities
Applications
Productivity SW
Operating Systems
Computers
Chips, devices
Atoms Materials
Value Chain
23 © 2007 Henry Chesbrough 2012

24. IBM’s Open Business Model
Integration Other Integrators
Solutions
Value-Added Activities
Applications Applications
Productivity SW Productivity SW
Operating Systems Operating Systems
Computers Computers
Chips, devices Chips, devices
Atoms Materials Materials
IBM Chain OEM Market
24 © 2007 Henry Chesbrough 2012

25. 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”
25 © 2007 Henry Chesbrough 2012

26. Procter & Gamble
•P&G used to be a VERY closed organization
–“We invented Not Invented Here”
J. Weedman
•P&G financial crisis, in 2000
–Missed a series of quarterly financial estimates
–Stock market lost confidence in the company
–Stock price fell by more than half in 4 months!
–CEO (Jagr) was fired
26 © 2007 Henry Chesbrough 2012

27. Searching for the Root Cause
•“We fundamentally had a growth problem. Our
current brands were performing well. But we
weren’t developing many new brands.”
C. Wynett
•To get new brands, P&G needed to open up.
•Connect and Develop strategy lead to:
–Crest SpinBrush
–Swiffer dusters
–Olay Regenerist
27 © 2007 Henry Chesbrough 2012

28. The New P&G
•Many processes to enable open innovation
–Technology scouts
–Legal templates for IP, partnering
–Investments in Innovation Intermediaries
•The Goal Now: Become the open innovation
partner of choice
28 © 2007 Henry Chesbrough 2012

29. Balancing Internal and External R&D
Funding: P&G
100
 Westinghouse
% from  Raytheon
External
 TI P&G 2002
 Nokia
0
 Hitachi
0 % from internal 100
29 © 2007 Henry Chesbrough 2012

30. Balancing Internal and External R&D
Funding: P&G
100
 Westinghouse
P&G
% from  Raytheon
2007
External
 TI 2002
 Nokia
0
 Hitachi
0 % from internal 100
30 © 2007 Henry Chesbrough 2012

31. 31 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

32. 32 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

33. Apple iPhone Collaborator Network
http://www.benmillen.com/portfolio/proje
cts/iphoneDeconstruction/map2.html
33 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

34. Apple iPhone Collaborator Network
http://www.benmillen.com/portfolio/projects/iphoneDeconstruction/map2.html
34 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

35. Benefits of Open Innovation?
• Multiple sources of ideas, parallel discovery
• Faster exchange of ideas through innovation actor
networks and shared development
• Lower costs
• Skilled labour is more mobile and independent
• Ability to outsource is growing with more distributed
workforce
• More agile, better able to deal with uncertainty of markets
and technology, more adaptive, more efficient
• End of knowledge monopolies (conventional IP models) as
predominant economic leverage
35 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark

36. Questions
?
36 Original material by Thomas J. Howard for course 42629 – Innovation and Product Development 2012
Department of Mechanical Engineering, The Technical University of Denmark