Learning to profit from ideas others can use

By D.C. Denison, Globe Columnist, 8/31/2003

`Not all the smart people work for you."

That's one of the central ideas driving a new approach to corporate research and development called "open innovation," which claims that competitive advantage often comes from leveraging the discoveries of people outside the company walls.

Henry Chesbrough, who recently left the faculty of Harvard Business School for the University of California at Berkeley, has been circulating this idea in academic and management journals. Now, from a new perch as executive director of the Center for Technology Strategy and Management at Berkeley's Haas School of Business, he's pushing the concept even further. Recently, he published a book on the topic, "Open Innovation: The New Imperative for Creating and Profiting from Technology" (Harvard Business School Press).

The starting point for Chesbrough's theory is the classic "closed" corporate research and development laboratory. Xerox's Palo Alto Research Center, known as PARC, and Bell Laboratories were paragons.

When I talked to Chesbrough last week, he listed the numerous factors that are "eroding" this model. Highly skilled workers are more available and more mobile, he said. As talented engineers and technologists "surf" from job to job, they take promising ideas with them, often using them as the basis for start-up companies. The growth of venture capital has also made an impact, providing many of these new idea-driven companies with much-needed capital.

And the combination of these two factors (job mobility and venture capital) creates a third dynamic: promising but neglected projects no longer spend much time on the corporate R&D lab shelf. Employees who believe in an idea, possibly backed by venture capitalists, are now usually able to find ways to commercialize it. Companies are also taking advantage of a wider variety of "external suppliers," who can provide expertise and crucial services only as needed. Finally, a "growing internationalization of knowledge" gives companies the option of tapping expertise in countries such as China, India, Russia, and the Philippines.

As a result of these changes, "none of them temporary," Chesbrough said, companies will have to learn to use external sources of ideas. The challenge in the future will be finding business models that turn new ideas into profitable businesses, whether those ideas originate inside or outside the company. Ideally, the flow of ideas will go both ways: A real marketplace means that companies will be expected to give as well as to receive. What's in it for companies, in return for sharing their own internally generated ideas? "If most companies took an inventory, they would find that they are only using a small fraction of the ideas they generate," Chesbrough said. "Most ideas never get to market, but they really can't be hoarded, either."

Chesbrough recommends that firms consider licensing ideas that they've developed but can't use. In addition to the revenue that licensing brings (IBM received more than $1.9 billion in royalty payments in 2001, Chesbrough reports), companies can learn from what other firms do with their ideas. And if the idea catches on, the company that developed it is in a good position to jump on the bandwagon with a new product or service, since presumably it retains some familiarity with the technology.

Although sharing ideas with potential competitors may still be too radical for some firms, Chesbrough sees signs the traditional approach is changing. "Corporate research and development is going to look different a lot different in the future," he said. "Look at how Novartis moved their worldwide R&D operation to Cambridge," he said. "That demonstrates that their first priority is to connect to the scientific and academic community."

Computer chip maker Intel has also recently opened a "lablet" in Berkeley, "led by a computer science guy at Berkeley who's on a two-year leave of absence," Chesbrough said. "The idea today is, `We don't need to create it, but we need to get access to it early and understand it.' "

Surprisingly, the world's largest software company appears to be going in the other direction. At Microsoft's meeting with financial analysts in July, chairman Bill Gates said that the company was planning to increase its R&D budget by 8 percent, to $6.8 billion, and add about 5,000 employees.

Chesbrough said he was surprised that the software firm was moving toward a large, centralized, R&D operation: "If you hire so many people, it can become a problem, a barrier. If there's a large internal group, the pressure mounts to only consider internal ideas, instead of the ones that come from outside.

"Not all the smart people work for Microsoft."

D.C. Denison can be reached at denison@globe.com.