Prof. Henry Chesbrough's speech at the Open Innovation Seminar 2008, the first event about the subject in Brazil, promoted by Allagi. The event took place at the World Trade Center São Paulo in June 16, 2008.

1. June 16, 2008 – São Paulo/SP
Henry Chesbrough
Center for Open Innovation – UC Berkeley
Palestra Open Innovation and Open Business Models
Open Innovation Seminar 2008 – Allagi
Inovação aberta - Brasil

2. Open Innovation and Open
Business Models
Open Innovation Seminar 2008
World Trade Center, Sao Paulo, Brazil
Henry Chesbrough
Executive Director
Center for Open Innovation
© 2008 Henry Chesbrough
UC Berkeley 2

3. Where Were the Great Ideas for
Innovation 50 or 100 years ago?
• Individual Inventors
• A few very large companies’ R&D labs
• “The key [to success] is to find a man of
genius, give him money, and leave him
alone.”
– James Conant, former President, Harvard Univ.
© 2008 Henry Chesbrough 3

4. The Current Paradigm:
A Closed Innovation System
Science
& The
Technology Market
Base
Research Development New Products
Investigations & Services
R D&E
© 2008 Henry Chesbrough 4

5. 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.
© 2008 Henry Chesbrough 5

6. R&D Spending by Firm Size, in $
250000
>25000
200000 10k-25k
in millions of dollars
5k-10k
150000 1k-5k
<1000
100000
50000
0
1960 1970 1980 1990 2000 2002 2003
© 2008 Henry Chesbrough 6

7. What changed?
Five Erosion Factors
1. Increasingly mobile trained workers
2. More capable Universities
3. Diminished US hegemony
4. Erosion of oligopoly market positions
5. Enormous increase in Venture Capital
© 2008 Henry Chesbrough 7

8. Where are the Great Ideas today?
• Individual Inventors
• SMEs
• Universities and Research Institutes
• Some large companies
• “Not all the smart people in the world work
for you.”
– Bill Joy, founder, Sun Microsystems, now
Partner at Kleiner Perkins.
© 2008 Henry Chesbrough 8

9. The Open Innovation Paradigm
Other Firm’s
Licensing Market
Technology Spin-offs
Internal New
Market
Technology
Base
Current
External Market
Technology
Base
Technology Insourcing
© 2008 Henry Chesbrough R D 9

10. Closed innovation
Open
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
Stolen with pride from Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from
Industrial R&D, 10th Annual Innovation Convergence, Minneapolis Sept 27, 2004
10 C 2002 Henry Chesbrough EIRMA SIG III, 2005-10-20

11. A New Perspective Towards R&D
R.I.PR.I.P
2007
Proudly Found
Elsewhere!
© 2008 Henry Chesbrough 11

12. 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
© 2008 Henry Chesbrough 12

13. Price per share
9/1
7/
1
100
110
120
130
40
50
60
70
80
90
10 998
/1/
10 199
/15 8
/
10 199
/29 8
/
11 199
/12 8
/19
11 98
/26
/
12 199
/10 8
/
12 199
/24 8
© 2008 Henry Chesbrough
/19
1/7 98
/1
1/2 999
1/
19
99
2/4
/1
99
2/1 9
8/
19
99
3/4
/1
3/1 999
8/
19
99
4/1
/1
4/1 999
5/
19
4/2 99
9/
19
5/1 99
3/
19
5/2 99
7/
19
6/1 99
0/
19
6/2 99
4/
19
99
7/8
/1
99
9
P&G Stock Price
7/2
2/
19
99
8/5
/1
8/1 999
9/
19
99
9/2
/1
9/1 999
6/
1
9/3 999
0/
10 199
/14 9
/
10 199
/28 9
/
11 199
/11 9
/
11 199
/25 9
/19
12 9
/9/ 9
12 199
/23 9
/19
1/6 99
/2
1/2 000
0/
20
00
2/3
/2
P&G’s Stock Price: 8/1998-3/2000
2/1 000
7/
20
00
3/2
/2
3/1 000
13
6/
2
3/3 000
0/
20
00

14. 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
– SpinBrush, Swiffer, Regenerist
© 2008 Henry Chesbrough 14

15. Example: Proctor & Gamble
A.G. Lafley
President and CEO
P&G
“We will acquire 50% of our
innovations from outside P&G”
Jeff Weedman Nabil Y. Sakkad
28 External Business Development managers SVP, R&D, Global Fabric & Home Care
VP, External Business Development
“There’s 1.5 Million people in the world who
“We don’t care where good ideas come from.” know about my business. I want them on my
team”
Larry Huston (just retired)
120 Technology Entrepreneurs
VP, Knowledge & Innovation, Corporate R&D
| 15

16. P&G Share Price Restored!
| 16

17. 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
© 2008 Henry Chesbrough 17

18. 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
Source: Gassmann, v. Zedtwicz (2002)
© 2008 Henry Chesbrough 18

19. Balancing Internal and External
R&D Funding: P&G
100
 Westinghouse P&G
% from  Raytheon
External 2007
 TI 2002
 Nokia
0  Hitachi
0 % from internal 100
Source: Gassmann, v. Zedtwicz (2002)
© 2008 Henry Chesbrough 19

20. Open Innovation examples in Latin and South America
Biocancer (Br) Provides drug development and clinical trial services to
international pharmaceutical companies, mostly from the USA
TVEI (Br) A company founded by local media industry experts, offers
multi-platform sport-related interactive content to consumers and
advertising services to businesses.
Movix (Ch) Technologies for mobile operators developed by former
employee of a large telco, the main product was licensed exclusively to
a(nother) telco
Akikb (Ch) Self-storage solution, not available in Chile at the time,
based on a widespread model from the USA and leveraging the
infrastructure of an established “sister” construction company
Alltournative (Mx) Ecotourism and recreational experiences with the
support and collaboration of local Mayan communities
Interfactura (Mx) Billing software and services initially developed for
a large firm and integrated to its network of suppliers
Source: Dr. Jaime Garcia Alba, IADB

21. Case Studies’ Innovation Sources
Biocancer TVEI Movix Akikb Alltournativ Interfactura
e
Product/Proce
Innovation Process Service Product Service Process
ss
Networking Global Value Global Value Company
Intra-industry Intra-industry Transplant
Patterns Chain chain Value Chain
Personal, Internal Sister Internal
Financing self self
Customer company Company company
Intellectual Assets Not Important Important Not Important Not Important Not Important Not important
Source: Dr. Jaime Garcia Alba, IADB

22. Case Studies Key Success Factors (KSFs)
 Initial Customers: Most start with very few clients, typically large
firms
 Prior Experience: A number of entrepreneurs have an international
background (prior US experience)
 Business Focus: Most offer services rather than products
 Source of Capital: Personal/Family sources initially, followed only
later by bank and PE/VC
 IP Protection: Not a KSF. Limited use of intellectual property
protection mechanisms
Source: Dr. Jaime Garcia Alba, IADB

23. Challenges facing SMEs
• Less internal R&D capability
• Less ability to absorb external R&D
• Less “status” as a partner for others
• Less market power, weaker ability to
capture value
• Less IP (usually, not always)
• IP Enforcement often too expensive
© 2008 Henry Chesbrough 23

24. Advantages of Small Companies
• Size: markets that are too small for large firms can
be attractive
• Focus: greater ability to execute for a specific
segment or set of customer needs
• Specialization: ability to develop deep knowledge
of a specific domain
• Entrepreneurial: external focus on results, much
less internal “politics”
• Speed: faster decisions, faster execution, faster
results
© 2008 Henry Chesbrough 24

25. Open Innovation Benefits for SMEs
• Large firms increasingly value collaborative
partnerships
• Large firms create platforms that seek supporting
investments from SMEs
• Users (customers) initiate more innovative
activity, a big opportunity for SMEs
• SMEs can expand geographically now at lower
cost, “hidden champions”
• Greater rewards to specialization in Open
Innovation
© 2008 Henry Chesbrough 25

26. Job #1: Strengthening the Current Business
Research Development
Internal Current
Research Market and
projects
Business
Model
Product/ Technology
Venture acquisition
investing
Technology
External research In-licensing
project
© 2007 Henry Chesbrough 26

27. Job #2: Finding and Growing the New Business
Research Development
License & JV Other firm’s
Market and
Business
Model
Venture & New
Acquisition Market and
Business Model
for your firm
Research Current
projects Market and
Business Model
for your firm
Venture
© 2007 Henry Chesbrough investing 27
External research

28. Issues for Open Innovation
• Where will the basic science come from?
• Will stronger Intellectual Property help or hurt
the greater inflow and outflow of ideas?
• Will companies accept external ideas as
willingly as internal ideas?
• Will companies allow internal ideas to flow
outside to other businesses?
• How can companies manage Open Innovation?
© 2007 Henry Chesbroug 28

29. Issues for Open Innovation in
Brazil
• Can Universities and Research Institutes rise
to the challenge of working more effectively
with industry?
• Can SMEs obtain the necessary financial and
human capital to innovate and grow?
• Are Intellectual Property laws and
enforcement sufficient for Open Innovation?
• Will large companies collaborate, or exploit?
© 2007 Henry Chesbrough 29

30. Sustaining Innovation Capabilities:
What You Innovate and How You Innovate
Business
Challenge: New Challenge:
What You Innovate
Model
Innovation Ways to Create and Ecosystem Design,
Capture Value Growth and
Sustenance
Changin
g the
What
Focus of Challenge:
Traditional Becoming an
Product Product Changing Innovation Partner
and Service Development the How
of Choice
Innovation Systems
“Closed” “Open”
How You Innovate
| 30

31. Graphic Illustration of a Generic Airline Business Model
Passengers Revenue
Air Travel
Costs
Food
Airport Aircraft, Fuel Cleaning
Runway Check-in Jetway
| 31

32. Ryan Air
• Ryan Air is a regional low-fare airline operating in
the United Kingdom and northern Europe.
• Only flies into regional airports, no landing fees.
• Guarantees airport certain # passengers in their terminal
• Airport pays Ryan Air to operate out of its airport
• Airport provides Ryan Air a percentage of the revenues
from shops, restaurants, car hire and hotels at airport.
© 2007 Henry Chesbrough 32

33. The Ryan Air Business Model
Passengers Air Travel
Revenue
Cost
Airport Food
Car Hire
Hotels Aircraft, Fuel
Shopping
& Food Parking
X
Jetway
X
Check-in
X XX
Cleaning
| 33

34. Business Model Maturity Stages
6 stages
1. Undifferentiated business model
2. Differentiated business model
3. Segmented business model
4. Externally aware business model
5. Integrated business model
6. Platform leadership business model
© 2007 Henry Chesbrough 34

35. Adopting Darwin’s Perspective
• “It is not the strongest of the species that
survives, nor the most intelligent that
survives. It is the one that is the most
adaptable to change.”
• By analogy, it is not the strongest or best
informed business model that prevails.
© 2007 Henry Chesbrough 35

36. The Business Model Innovation
Gap
• Who is responsible (budget and authority) for
business model innovation at your company?
• What processes are in place to experiment with
alternative business model possibilities?
• How do resources for business model innovation
compare to resources for technical innovation?
© 2007 Henry Chesbrough 36

37. What is Innovation?
Before
• Invention
• Product
• Technology-driven
• Internally generated
• Engineering’s job
© 2007 Henry Chesbrough 37

38. What is Innovation?
Before After
• Invention • Commercialization
• Product • Business, including
process and biz model
• Technology-driven • Business/value-driven
• Internally generated • Internal Integration of
• Engineering’s job int. and ext. stuff
• Everyone’s job
© 2007 Henry Chesbrough 38

39. © 2007 Henry Chesbrough 39