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strategy and business
 / Summer 2011 / Issue 63(originally published by Booz & Company)


The Thought Leader Interview: Henry Chesbrough

S+B: How does openness lead to economies of specialization? What’s the link?
Like innovation in products and technologies, innovation in services benefits greatly from specialization. By using open services innovation to harness the forces of scale and scope economies, services firms can get more value and more growth from their core capabilities. But the highest and best use of these capabilities is in open innovation approaches to constructing business platforms. These platforms induce others to invest their time, money, energy, and ideas in extending your initiatives. As they do, your platform becomes more attractive to more customers, while becoming more profitable and sustainable for you.

“Real Men Have Fabs”

S+B: Talk about some of the other examples of open services innovation from your book, like Taiwan Semiconductor Manufacturing Company (TSMC). It’s not a business you’d obviously think of as a service business. In fact, within the Internet economy, semiconductors are as close to a “big-iron” manufacturing industry as you could think of.
That’s right. Real men have fabs [wafer fabrication plants]. In the early days of the computer industry, up to the early or mid-1960s, if you wanted to build semiconductor chips, you had to design and build the systems into which the chips went. So IBM, AT&T, NTT in Japan — the major systems companies of that era — had captive semiconductor manufacturing operations. Then along came companies like Intel in the late 1960s, which created chips that were designed to be IBM mainframe replacement chips. Under the model these companies developed — integrated device manufacturing — you no longer needed to design the entire system to design better chips, and these companies could provide customers with 10 times the performance for about the same cost. This was a really strong value proposition, and it launched the so-called fair children: the companies launched by Fairchild Semiconductor engineers, such as Intel, National Semiconductor, and Motorola’s semiconductor operations.

By the 1980s, engineers at TSMC were able to separate the manufacturing of the chip itself from the design of the chip, and they developed “the foundry model.” This is essentially a services model. TSMC provided its clients with manufacturing services from its foundries: The clients designed the chips and took the designs to TSMC, and TSMC built the designs into chips. Prior to this, if a company wanted to design chips, it had to make investments in wafer fabrication plants to build them, so starting a chip company was very capital intensive. The designs weren’t cheap, but the real costs were in the manufacturing.

By taking over the manufacturing job, TSMC enabled the rise of a lot of so-called fab-less chip startups. They could develop really good chips, but they didn’t have to make the investments in manufacturing. They could hire the manufacturing for only what they needed, for the volumes they had. They didn’t have to fill an entire factory. This was a big step forward in terms of the business model, because it allowed many new companies to enter the business with much lower capital requirements. It’s a high-tech kind of co-creation: Chip designers use tools from TSMC and independent companies to design their chips, and TSMC uses tools to verify that the design works, and then it builds the chips.

In its most recent incarnation, TSMC has announced what it calls its open innovation platform — TSMC’s words, not mine, but of course I love the term. They’re not only opening up the manufacturing, but the designs as well. They sell references, process technologies, and methods, and share their intellectual property (IP) in how to do all this well. In other words, TSMC not only creates its own intellectual property to support its manufacturing of these chips; it also invites third parties that have their own specialty design tools to provide their intellectual property to TSMC, and TSMC essentially sells it for them. So now you can actually get paid when companies use your tools to design their chips.

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