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R&D Through Open Innovation

(originally published by Booz & Company)

Since the days of Thomas Edison’s Invention Factory, new product innovation has been the engine of long-term growth and a buffer in times of economic weakness for world-class companies. Yet even respected research powerhouses like British Telecom, Siemens, and Fujitsu are today finding it more difficult to make their innovation investments pay. There is too much piling up on the shelf, and there are too few breakthroughs that lead to new markets and higher growth. In short, R&D labs once prized for their independence and proprietary research find they’re having a terrible time extracting value from their own work.

To increase the return on their R&D, successful innovators are finding they must complement their in-house R&D with external technologies and offer up their own technologies to outsiders. R&D at large companies is shifting from its traditional inward focus to more outward-looking management — open innovation — that draws on technologies from networks of universities, startups, suppliers, and competitors.

Until recently, private R&D labs wouldn’t have dared try open innovation; R&D was viewed as a vital strategic asset and, in many industries, a barrier to competitive entry. Research leaders like DuPont, Merck, IBM, GE, and AT&T did the most research in their respective industries — and earned the most profits as well.

The change is striking. Most of the premier industrial research laboratories of the 20th century have retreated from their historic mission of independent scientific discovery because of the low yields they’re experiencing. According to Forbes magazine, the last household-name product launched by DuPont’s 100-year-old Experimental Station (dubbed the Ex Station) laboratory, which created products used to make everything from leisure suits to parts that protect NASA spacecraft, was Stainmaster fabric protection — in 1986.

Slowing innovation from within large companies doesn’t mean internal R&D should be dismantled; it’s not a question of “make or buy.” However, the open innovation approach poses new management demands. For one thing, companies need to think differently about how opening labs to outsiders can create opportunities for technology exchanges that lead to revenue. Internal R&D produces intellectual property that other companies in the web of open innovation may covet. In 2001, IBM earned $1.9 billion in revenue from patent licensing and royalties on its software, chips, and systems, for example.

The perspective of internal R&D must also change: from depth to breadth and integration. Whereas old-school research labs took new technologies from basic science to finished product, open innovation labs need to develop technologies that embrace and extend existing intellectual property — even those that are “not invented here.”

DuPont now partners with biotechnology firms to develop such products as Sonora, a polyesterlike fiber made from corn and a genetically engineered bacterium. Automobile manufacturers don’t try to reinvent the wheel; they collaborate with suppliers and research organizations to stay on top of such new technologies as fuel cells and continuously variable transmissions. Automakers still do internal R&D, but their in-house teams work on integrating the technologies they see emerging, using advanced computer modeling and simulation tools.

Industries that have been slower to catch on to open innovation should take these leaders’ cues. Large toy manufacturers, for example, complain that they are in a mature business, with low growth in overall toy sales. They overlook the fact that breakthrough toys still hit the shelves. Many blockbusters have come from smaller shops, rather than the large toy companies. Why? The big toymakers constrain their search by insisting that any new toy bring in $100 million or more in its first year. Even such leading toys as Barbie and Hot Wheels would have failed to bring in a comparable amount when they were introduced in 1959 and 1969, respectively. An insistence on large initial sales condemns the toy manufacturers to merely extending existing brand franchises, or acquiring at a high price new toys successfully launched by smaller innovators.

Contrast that process with the one followed by video-game developers, which routinely look outside for ideas. Some successful games are based on popular brands, such as John Madden Football or Star Wars. Developers hunt for hot properties to license and turn into new games. Other successful titles, such as the Grand Theft Auto series, were coded by small groups of developers (such as Rockstar Games) that were later acquired by larger companies (such as Take-Two Interactive Software Inc.) that could provide distribution and marketing.

As the toy industry illustrates, the principle of open innovation isn’t limited to high-tech industries. In fact, any company spending 5 percent of sales on R&D and looking to get higher revenue growth would likely benefit from shifting its R&D to a more open stance.

But the key to change isn’t simply finding partners; it is embracing a management philosophy that reorients an enterprise’s innovation activities away from the search for “Eureka!” moments. Instead of building R&D laboratories far away from others to protect the ideas inside, innovators today are locating new facilities next door to universities to gain faster access to ideas. The winners create value when they combine their ideas with those of others, and when others use their ideas.

Henry Chesbrough,
Henry Chesbrough is an assistant professor and the Class of 1961 Fellow at the Harvard Business School. He is the author of Open Innovation: The New Imperative for Creating and Profiting from Technology (Harvard Business School Press, April 2003).
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