"Open Innovation" Key to Thriving in Today's Competitive Landscape

When Haas School Adjunct Professor Henry Chesbrough was working for disk drive maker Quantum in the 1980s, he chalked up the startup's success against behemoth IBM to entrepreneurial hustle and hard work.

But later, after writing his Ph.D. at the Haas School and case studies at Harvard Business School, Chesbrough realized several underlying patterns explained the success of Quantum as well as other companies.

University of California Chesbrough encapsulates these patterns in a new paradigm that he calls "open innovation," which he has written about in two books since 2003. In the process, he has become widely recognized as one of the nation's leading thinkers on the topic of innovation.

"Open innovation is about organizations making much greater use of external ideas and technologies in their own businesses, while allowing their unused ideas to be used by other companies," says Chesbrough, who was named one of the top 50 innovators in 2003 by Scientific American.

Best Business Book
To succeed today, firms must take a more outward-looking approach by seeking out external ideas, Chesbrough explains in his first book, Open Innovation: The New Imperative for Creating and Profiting from Technology. It was named "Best Business Book of 2003" by Strategy+Business magazine.

But open innovation doesn't apply only to technology companies, Chesbrough notes. One success story is consumer products giant Procter & Gamble, which has set a goal of sourcing 50% of its innovation from outside the company and makes unused ideas generated by its labs available to other firms after three years.

"No company has a monopoly on useful knowledge anymore," Chesbrough says. "Useful knowledge is becoming more and more widespread all over the world."

Chesbrough's second book, Open Business Models: How to Thrive in the New Innovation Landscape, builds on his first book by explaining how firms can make money in an open innovation landscape. BusinessWeek named Open Business Models one of the five best books offering advice on innovation in 2006. Since his book hit bookshelves, Chesbrough has been asked to write about innovation for such publications as the Wall Street Journal, BusinessWeek, and Forbes.com.

To make open innovation happen, Chesbrough argues that firms must not only change their innovation process but also their business model—the way a firm captures value. In one novel example, Chesbrough argues that Microsoft should actually welcome piracy of its software in China in order to strengthen its position against its free rival, Linux.

Silicon Valley Experience
Chesbrough earned his MBA at Stanford University and went on to work in a variety of product management and marketing positions at Quantum in Milpitas, California. He first became keenly aware of how different business models can affect an organization while at Haas writing his Ph.D. dissertation comparing the US and Japanese disk drive industries. After completing his Ph.D. in 1997, Chesbrough worked as an assistant professor at Harvard Business School, where he wrote his first book.

Chesbrough returned to Haas in 2003 to become executive director of the Center for Open Innovation, which is part of the Institute for Management, Innovation, and Organization housed at the Haas School.

As executive director, Chesbrough created the Berkeley Innovation Forum, a community of more than two dozen businesses that meets twice a year to exchange ideas, issues, and practices related to innovation. Members include a wide range of companies, such as IBM, Cisco Systems, DuPont, Kraft Foods, and Fujitsu.

Innovation Coursework
In addition to directing the center, Chesbrough passes his knowledge about innovation to students through three courses: Introduction to Management of Technology; Managing Innovation and Change; and Innovation in Services and Business Models.

Chesbrough even applies his principles of open innovation in the classroom, learning of yet more examples of open innovation in the workplace from his students. "My students were the first ones to turn me onto Facebook," says Chesbrough. "And another student paper examined how Amazon is selling access to its back-office functions to other online retailers, as a separate business opportunity for Amazon."

"The students in my classroom have been a vital part of my own process of reflection on open innovation," Chesbrough adds. "Their questions, arguments, and conclusions have helped me test and revise my own thinking about innovation. And they help me keep current with what's going on in the ever-changing world of innovation."