Summer 2005

Power of Ideas

Creating a Place for Open Innovation
Henry Chesbrough on strategies and tactics to encourage new ideas at your company.

Henry Chesbrough, Ph.D. 97, is the executive director of the Center for Open Innovation at the Institute of Management, Innovation & Organization at UC Berkeley. He is also adjunct professor in the Management of Technology Program, where he teaches Managing Innovation and Introduction to the Management of Technology.

Here is an excerpt from chapter nine of his award-winning book, Open Innovation.

In many industries today, the logic supporting an internally oriented, centralized approach to research and development has become obsolete. Useful knowledge is widespread in many industries, and ideas must be used with alacrity if they are not to be lost. These factors create the new logic of Open Innovation, which embraces external ideas and knowledge in conjunction with internal R&D. This logic offers new ways to create value, along with the continuing need to claim a portion of that value.

The presence of many smart people outside your own company is not simply a problem for you or a fact of life to be regretted. It poses an opportunity for you. If the smart people within your company are aware of, connected to, and informed by the efforts of smart people outside, then your innovation process will reinvent fewer wheels. What's more, your internal efforts will be multiplied many times through their embrace of others' ideas and inspiration.

This is a powerful value creation engine; it will not, however, enable you to capture a portion of that value. For that, you will need your internal R&D activities. They help resolve complex interdependencies in nascent technologies to create architectures and to advance them later on. Your business model will define what portions of the value chain you will need to provide internally, and it will link those portions to the surrounding value network that creates and delivers that value to your customers. Buying and selling intellectual property is a powerful way to establish and accelerate the realization of your business model. And mechanisms such as corporate venture capital, licensing, spin-offs, external research projects, and IP are today important levers in the innovation process.

There remains, however, the significant problem of transition: How can you and your company move from a mentality of Closed Innovation to one of Open Innovation? In a related vein, how can you persuade your organization to give up a certain amount of control, to access and utilize the wealth of external knowledge? Here are some ideas to help you begin this transition, to begin the journey toward a more open innovation process.

Taking Stock: Survey Recent Innovation Activities
A good place to start on Monday morning is to take stock of recent innovation activities in your own company and in other companies in your industry. The goal here is to build a strategic map that shows the sources of recent innovative ideas for your company and your industry. Ask yourself these questions as you build your map:

Consider the first question, the source of recent innovations in your industry. In workshops with executives, I invite them to list some of the key innovations that have come into their industry in the recent past. I then inquire about the source of these key innovations. Often, many important innovations that really changed the industry actually came from some rather surprising places, places one wouldn't initially expect. I also find that many companies' own R&D staff members are so busy meeting shorter-term objectives with incremental innovations that they contribute fewer fundamental insights than their budgets would initially suggest.

Defining your own business model is an important related exercise. What is your target market? What are your key value propositions to that market? How do you get paid? How do you create and capture value? Who are the key third parties? Many companies lack clear, consistent answers to these questions. It is valuable to capture your business model and then share it within your company. Among other benefits, your business model provides a language for connecting technical activities and business activities in your innovation process.

Once you have defined your own business model, look at which companies have recently started up in your industry. Are any of these entrants experiencing success? If so, why? What is their business model? How does it differ from yours? These start-ups can be important sources of experimentation with business models, technologies, and markets in areas that established companies often neglect. Many large companies don't follow start-ups very closely or take them very seriously. In a world of Open Innovation, it is a mistake to ignore start-ups, and it is a virtue to study and learn from their experience.

Another exercise is to take a venture capitalist to lunch. This is harder than it may seem. Most venture capitalists lead hectic lives and are very hard to schedule. And many of them find little in common with company executives. So be prepared for a skeptical reaction. You'll find that thoughtful venture capitalists will make time for you, though, if you're willing to share information about market and technology trends in areas in which they are actively investing. And you'll find that they have well-informed opinions about these issues as well and have "put their money where their mouth is" by investing accordingly. Don't be surprised if these opinions differ from your own, and resist the tendency to defend your views. Instead, listen and see whether there may be some merit in their perspective. Remember that you do have something of value to offer: Your company may be a coinvestor, a technology or marketing ally, or even an eventual acquirer of a venture capitalist's portfolio company. These days, in the collapse of the stock market bubble, savvy venture capitalists are seeking to build stronger relationships with corporations.

Finally, you should assess the state of relations between your company and any universities whose faculty are doing research in areas of interest to your industry. A good relationship involves far more than simply donating some money when the development office comes calling. It requires you to build personal relationships between your technical staff and individual faculty members and their students. You will need to share information, ideas, successes, and failures with them. You should be prepared to learn from them, as well.

This inventory of your current innovation activities will help you perform two critical tasks that will define your company's future: First, it will advance your current business. Second, it will define and grow your new business.

Reprinted by permission of the Harvard Business School Press. From Open Innovation: The New Imperative for Creating and Profiting from Technology by Henry Chesbrough. Boston, MA 2003. Copyright 2003, by the Harvard Business School Publishing Corporation, all rights reserved. For information on this book, visit

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Henry Chesbrough, Ph.D. 97

Henry Chesbrough, Ph.D. 97
"Often, many important innovations that really changed the industry actually came from some rather surprising places, places one wouldn't initially expect."