Recession is a time for innovation

Henry Chesbrough, Director of the Open Innovation Centre at Berkeley University.

“The nice thing about Open Innovation in business models is that it isn’t just about having more money, it is about thinking differently about what you can offer to your customers and finding new ways to differentiate your business and add value to it,” said Chesbrough, Director of the Open Innovation Centre at Berkeley University in California, in an interview with Science|Business on a recent visit to Barcelona, where he is Visiting Professor at the business school, ESADE.

With world economies struggling, Chesbrough urges governments to support innovation. “The only way that countries with high debts are going to be able to deal with it is to figure out new ways to get economies to grow again, and to get this growth we need innovation,” he says. “It’s too punishing to citizens to simply cut spending and services, if we don’t get economies to grow again, it will be politically very difficult. Innovation is not only for companies, but for society.”

Converting a product into a service

At a time when statistics say that an average of 70 per cent of gross domestic product comes from the service sector, a clever way to increase revenues, says Chesbrough, is to convert a product into a service. In that model, “You add value by offering more services,” he explains.

Some of the world’s leading firms, including General Electric, Rolls-Royce, IBM and Ericsson, realised this some time ago, evolving from selling stand-alone products or services, to integrating the two. Services that add value to the actual product are now likely to account for over 50 per cent of revenues.

Of course, converting products into services is not straightforward. “Traditional industry structures need to be changed and continuously refined over many years. There will be difficulties, but it will be a natural evolution because consumers ask for these sort of services,” Chesbrough believes.

“The benefit is that you get more value, because you are providing more to the customer [by] taking care of the product across its lifecycle,” Chesbrough noted.

But converting a product into a service is not the only way to innovate. While researchers and companies could afford to ignore the study of service innovation in the past when rich economies were powered by manufacturing, the situation has now changed. Innovation in services per se is a hot area, which has caught Chesbrough’s attention.

Now, the question that business leaders and academics are trying to answer is not so much how to innovate in manufacturing industries such as pharmaceuticals or electronics, but how to innovate in services sectors, ranging from recruitment and human resource management, to education and health care.

Intellectual property as a source of growth

In terms of the relationship between intellectual property and innovation, Chesbrough, proposes a change of attitude, saying, “IP is not a threat, but an opportunity, a source of value,” Speaking at a conference organised by ESADE and la Caixa de Catalunya on his visit to Barcelona in June, he highlighted the example of the world-renowned Spanish chef Ferran Adrià, and intellectual property relating to his restaurant El Bulli.

Chesbrough described how Adrià applied Open Innovation to break the mould in haute cuisine, mixing his knowledge of gastronomy with ideas of how physical chemistry applies to cooking, developed by the French scientist Hervé This. As a result, molecular gastronomy was born, along with a brand-new range of food flavours and textures.

Adrià’s innovative attitudes go beyond food, Chesbrough told delegates. During the six months that El Bulli restaurant closes every year, he is on the look out for new business ventures and partnerships. For example, Adrià has worked with the Italian coffee company Lavazza to develop a solid coffee using his famous ‘spherification’ process. He has also collaborated with companies such as NH Hoteles and the Spanish airline Iberia.

“These companies are using El Bulli’s IP and they are bringing their trade marks and their experience and design into Adrià’s business; this is new revenue for El Bulli,” Chesbrough explained. On his recent appointment as Doctor Honoris Causa by the Technical University of Valencia in Spain, Adrià said that in the next stage of development of El Bulli, he will collaborate with universities and will set up an Ideas Laboratory; every year, 20 interns will be hired, and ideas will be shared publicly on the Internet.

Intellectual property as a barrier to Open Innovation

Restrictions around intellectual property often create a barrier to the sharing of ideas, while at the same time some estimates say that as many as 88 per cent of patents are never used.

One way to breathe life into neglected IP would be a pool to which companies contribute patents they are not using - in return, they could get a tax cut if they make an unused technology available to others, Chesbrough suggested. The key issue is to create more opportunities to apply technologies in different areas, he emphasised.

For example in pharmaceuticals, a company may be developing a drug to treat cancer that is also relevant to treating heart disease. So then the agreement could be, “In cancer it’s mine, in heart disease it’s yours,” Chesbrough said.

Open Innovation and the Green Exchange

In cleantech, Chesbrough is working in collaboration with sports firm Nike and Science Commons to encourage companies to share ideas on the website Green Exchange. Businesses in developing countries can download instructions to build and deploy the technologies described on the site. Chesbrough said he had never worked in cleantech before, but was persuaded to get involved by some of his students, following the failure of the Copenhagen Climate Change meeting, last December.

The Green Exchange is collecting technologies and intellectual property that will be freely available. It is hoped the main business and social impact will be that companies in countries such as Indonesia, or India, or China, that are genuinely concerned about being environmentally friendly, but don’t know where to get started, will use the site.

“It’s an easy, transparent, efficient system, you can see right away the technologies that are available. Once we get people using it, everybody can see what’s the most used technology, so they know where to start,” Chesbrough explains.

Companies can put certain stipulations on the use of their ideas. “The companies which contribute can specify the terms under which they are willing to work this intellectual property and share with others. This can range from ‘You can do anything you want with it as long as you give me attribution’ or ‘You can use to for research’ or ‘If you want to sell products [based on] it, you must come to me for a license’ or ‘I’m going to use it in my field of use, and you are welcome to use it in your field of use’,” Chesbrough said.

As an example, Nike, holds rights to a water-based adhesive that was developed to replace a more polluting petrochemical-based product. The company is to put the adhesive on the Green Exchange, allowing companies outside the footwear sector looking for a more environmentally-friendly glue to use this technology for free, or for a very modest license fee.

While the mindset of some companies may be to keep their IP away from other companies, and to be reluctant to use ideas developed by others, Chesbrough says there are many benefits to contributing technology to the Green Exchange.

One particular motivation is that suppliers of western companies located in developing countries like China and India may have difficulty getting access to environmentally-friendly technologies.

As companies come under increasing pressure from consumers to be greener, Green Exchange is a powerful tool to get the best ideas from all over the world into the hands of the people who can apply it to minimise environmental impact, not only in advanced economies, but also in the developing ones.

Better technology, or better business model?

While innovating in new products and technologies is important in and of itself, the challenge of Open Innovation at the moment is more in improving business models. “What’s better, better technology or a better business model?” Chesbrough asked delegates, saying he strongly believes that a better business model often would be able to outbid better technology. Many companies develop technologies that never find their way to the market. But take the same technology, add a different business model, and a product can be successful, Chesbrough stated.

For Chesbrough, the best business model is platform leadership, in which other companies add value to your product. The iPhone, iPod and iPad, with their huge range of applications, services and components developed by companies other than Apple, are perfect examples. The proof of this rather rich pudding came in December 2008, when the venture capital firm Kleiner Perkins Caufield & Byers launched the iFund, a $200 million fund backing developers of Apple-related products.

Crisis times are good times for Open Innovation

Experience shows how a crisis can create the right moment to apply creative thinking, develop a better business model and embrace Open Innovation. One well known example here is consumer goods giant Procter & Gamble, which was forced to drop its “not invented here” attitude and look outside for innovation to drive new revenues in a financial crisis some ten years ago.

P&G’s resulting commitment to Open Innovation has led it to develop an innovation portal where the general public can contribute ideas on how to improve its products and services, P&G Connect + Develop. The site acts like an innovation intermediary, a key factor for the success of Open Innovation. “Innovation intermediaries act like brokers who help people who have ideas and technology to connect to people who have needs in the market, and need to use those ideas,” Chesbrough explained. Rewards for contributing to P&G portal include collaboration contracts to implement ideas.