Business Report

Sharing Secrets to Innovate More Profitably

Offering your best ideas to others may sound like bad business. But it’s better than keeping them under wraps, explains Henry Chesbrough, the father of open innovation.

In the world of technology, new ideas rule. But that doesn’t mean companies should keep their research labs under lock and key. Henry Chesbrough, a professor at the Haas School of Business at the University of California, Berkeley, has spent years documenting the benefits of “open innovation.” Chesbrough recently told Tom Simonite, Technology Review’s IT editor for hardware and software, why it works.

TR: What is open innovation?

Chesbrough: It’s the idea that companies should make greater use of external ideas and technologies in their own business and allow their own technologies and ideas to be used by others in their business. The term originated in 2003 when I published my first book on the topic.

What benefits does this approach offer compared with keeping everything in house?

If you bring outside things into your organization, you reduce your time to market, because you can work with things that have already undergone some level of development. You can also share some of the costs of development.

In the other direction, sharing ideas and technologies from your own business can open up new revenue streams—for example, if you license something or spin it off into a new enterprise.

Are these ideas scary to businesses used to carefully keeping new ideas to themselves?

Companies don’t like to compete with their own [ideas]. They consider it selling to the enemy. Companies can more easily see the benefits of bringing in external ideas to their company. [But even that faces the barrier of] Not Invented Here syndrome. It stems from arrogance—the feeling that if something comes from outside, it can’t be that good, because if it was, it would have been developed in-house.

Can you give an example of a company that successfully opens its new ideas to others?

A great example is Procter & Gamble, which has a policy they call “Use It or Lose It.” Three years after one of their products ships with a new technology, or five years after a patent issues, even if they don’t use it in the market, that technology is allowed to be used by others as well. It forces a certain speed on the process of evaluating their technologies.

One successful strategy is keeping a great idea to yourself for a while and then letting it be used by others only when you’ve moved onto the next one. I call that turning competitors into happy followers.

In economic terms, why does open innovation work?

When you look at the fundamental economics, a company’s R&D is actually a monopoly: it’s the only one that can supply new ideas and technology to the business. The business unit is a monopsony, a single buyer, the only buyer of new ideas and technologies.

There are a lot of good economic reasons that monopolies and monopsonies are inefficient. They’re not very innovative either, because there are big incentives for delay and slowing things down. Open innovation breaks down those monopolies and monopsonies and introduces competition for both sides.

Open innovation cannot be without risks, though.

No. Intellectual property is a particular challenge. You have to be careful that you actually have rights to use other people’s ideas and that they actually have the right to give them to you. If you allow your ideas to go outside, you have to pay attention to get the intellectual-property rights lined up correctly.

What has changed in the years that you’ve been researching open innovation?

One big change is that companies don’t have to figure it out by themselves any more. They now have the option of going to innovation intermediaries, such as InnoCentive, which helps companies with the process. [Chesbrough is on Innocentive’s board of advisors.]

I’ve also come to understand more the importance of public information resources. I’ve been working with an organization called GreenXchange, making a patent pool for green and renewable technologies that will be available for people around the world to use and license on very transparent terms. It should accelerate green-tech innovation.

You have just published a new book, Open Services Innovation. What did you learn about innovation in the course of writing it?

The new book looks at the service sector. When I started my research, I thought I’d be writing about banking, insurance, and retail. But I came to the view that there isn’t a hard line between technologies and products and services. Companies that had been making products and building new technologies have started to build services around those to complement and extend them.

I think this is the key to regaining U.S. manufacturing strength. We don’t just want to make the products—they’re just the platform upon which you can then erect applications and services that you and others can innovate with and on top of.

Can you give an example of a tech company that has done that?

Yes, Amazon. It began as a bookseller but now offers a lot of merchandise that has nothing to do with books. Most of those things are not stocked by Amazon. They made their internal tools and technologies used to manage their site available to external merchants. A user cannot tell the difference, but the third parties handle the complexity of figuring out how much stuff to stock and how to distribute it.

By opening up its internal tools to others like that, Amazon has become able to sell a lot more stuff without a lot of the risk of handling it directly.

Amazon has also opened up the very large server infrastructure it built to keep the website running, creating a new business, Amazon Web Services. Renting out their own server infrastructure provides a new revenue stream and reduces Amazon’s costs by increasing their utilization of the servers.

They’ve used open innovation to achieve economies of scope, by allowing third-party sellers, and economies of scale through their Web services.

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