1. STRATEGIC MANAGEMENT OF TECHNOLOGY PROFESSOR: LEE, MARCH 29TH 2010 The Open Innovation Paradigm (Chapter 3) PRESENTED BY PABLO ROSALES

2. Presentation Contents 1. Presentation Goals 2. Overview Analysis of The Open Innovation Paradigm 3. A comparison between the Open Innovation Paradigm and the Closed Innovation Paradigm 4. Conclusions: What can we learn about The Open Innovation Paradigm ? 5. Final Remarks 6. Questions / Answers.

3. 1. Presentation Goals To present: 1) An overview analysis of the Open Innovation Paradigm (OIP). 2) A comparison between the Open Innovation Paradigm and the Closed Innovation Paradigm 3) The main lessons that can be learned from the OIP from three perspectives: manager, entrepreneur and researcher.

4. 2. Overview Analysis of The Open Innovation Paradigm

5. 2.1. Initial Notions Scientific Paradigms (as defined by T. Kuhn)  What is to be observed and scrutinized  The kind of questions that are supposed to be asked and probed for answers in relation to this subject  How these questions are to be structured  How the results of scientific investigations should be interpreted

6. 2.1. Initial Notions Open Innovation Paradigm: What are we talking about ?  A relatively new paradigm of Innovation  A new way of managing Research and Development in and outside organizations.  A shift in:  Mindsets  Principles to manage R&D  The way to manage resources  The logic of business

7. 2.2. Analysis Framework for the Open Innovation Paradigm: A Managerial Perspective Venture Capital Market Main Driving forces Skilled Human Capital Knowledge Landscape Key elements in the paradigm to be managed Knowledge VC People Mindset Markets Research IP Universities Government Startups Strategic Management tasks External options for Ideas Capabilities of suppliers Logic of the paradigm To be managed Architectures Environment Characteristics Many ideas exist High labor mobility Active Venture Capital Numerous start-ups Universities are important

8. 2.2.1. Main Driving Forces Venture Capital Market Main Driving forces Skilled Human Capital Knowledge Landscape External options for Ideas Capabilities of suppliers Environment Characteristics Many ideas exist High labor mobility Active Venture Capital Numerous start-ups Universities are important

9. 2.2.1. Main Driving Forces The Knowledge Landscape  Ideas abound in the environment, inside and outside organizations.

10. 2.2.1. Main Driving Forces The Knowledge Landscape (…continued)  Knowledge in Universities  Human Capital: Professors are experts in their fields Students learn from professors Many of them, professors and students are eager to apply Science to solve business problems. Examples of students that became entrepreneurs: Luis von Ahn, PhD. Computer Science CMU, Founder of reCaptcha (http://recaptcha.net/)http://recaptcha.net/ Aaron Edsinger, PhD. Computer Science MIT, Founder of Meka Robotics (http://mekabot.com/)http://mekabot.com/  Rise in college and post-college graduates  In top universities like Stanford and MIT, more than half of postdoctoral scientists and engineers come from outside U.S.

11. 2.2.1. Main Driving Forces The Knowledge Landscape (…continued)  Knowledge in Universities  Research activities Research is done not only in U.S. top universites Many universities around the world do high-quality research

12. 2.2.1. Main Driving Forces The Knowledge Landscape (…continued)  Patents  Distribution among companies in relation to their size: The patents issued by USPTO in 1999 were as follows: Small companiesTop 20 companies 88.4%11.6%

13. 2.2.1. Main Driving Forces The Knowledge Landscape (…continued)  Patents  Distribution in non-US companies (patents issued by USPTO in 1999 ) US CompaniesNon-US Companies 55 %45%

14. 2.2.1. Main Driving Forces The Knowledge Landscape (…continued)  Patents  R&D by size of enterprise (U.S. government statistics of R&D) Company Size (employees) 198119891999 < 10004.49.222.5 1000 – 49996.17.613.6 5000 – 99995.85.59.0 10000 – 2499913.110.013.6 25000 +70.767.741.3

15. 2.2.1. Main Driving Forces Skilled Human Capital  Higher availability and mobility of skilled workers.  Talented engineers “surf” from company to company selling their talents to the highest bidder.  Individuals invest in their own education.  Immigration policies in the U.S. favored availability of skilled professionals.

16. 2.2.1. Main Driving Forces Venture Capital Market  Start-up firms funded by VC, offer stock-option packages to the personnel when they join.

17. 2.2.1. Main Driving Forces External options for ideas  Additional paths for ideas outside the company Research Organization Buffer External start-up Development Organization New Market Current Market

18. 2.2.1. Main Driving Forces Capabilities of suppliers  External supply base is very developed  Suppliers offer equal or superior quality to what a company can achieve internally.

19. 2.2.2. Key elements to be managed Venture Capital Market Main Driving forces Skilled Human Capital Knowledge Landscape Key elements in the paradigm to be managed Knowledge VC People Mindset Markets Research IP Universities Government Startups External options for Ideas Capabilities of suppliers Architectures Environment Characteristics Many ideas exist High labor mobility Active Venture Capital Numerous start-ups Universities are important

20. 2.2.3. Logic of the paradigm: key principles Venture Capital Market Main Driving forces Skilled Human Capital Knowledge Landscape Key elements in the paradigm to be managed Knowledge VC People Mindset Markets Research IP Universities Government Startups External options for Ideas Capabilities of suppliers Logic of the paradigm Architectures Environment Characteristics Many ideas exist High labor mobility Active Venture Capital Numerous start-ups Universities are important

21. 2.2.3. Logic of the paradigm: key principles Open Innovation Principles Not all the smart people work for us. We need to work with smart people inside and outside our company. External R&D can create significant value; internal R&D is needed to claim some portion of that value We don’t have to originate the research to profit from it. Building a better business model is better than getting to market first. If we make the best use of internal and external ideas, we will win. We should profit from others’ use of our IP, and we should buy others’ IP when ever it advances our own business model.

22. 2.2.4. Strategic Management Tasks Venture Capital Market Main Driving forces Skilled Human Capital Knowledge Landscape Key elements in the paradigm to be managed Knowledge VC People Mindset Markets Research IP Universities Government Startups Strategic Management tasks External options for Ideas Capabilities of suppliers Logic of the paradigm To be managed Architectures Environment Characteristics Many ideas exist High labor mobility Active Venture Capital Numerous start-ups Universities are important

23. 2.2.4. Strategic Management Tasks Under the new paradigm, managers should:  Change their perspective about R&D  Adopt new principles and strategies to manage the following elements:  Knowledge, R&D  Venture Capital  Intellectual Property  The Architectures of systems  People Internal Researchers Customers

24. 2.2.4. Strategic Management Tasks Managing knowledge, R&D  Working with universities  Hiring professors and or their students for research projects  Although not owning the research results, this strategy could lead a company to gain early access to any promising results.  Working with start-ups  Scout around the work they do on specific areas of interest.

25. 2.2.4. Strategic Management Tasks Managing knowledge, R&D (… continued)  Access and integrate external knowledge. Combine them in a timely way, creatively combining them to deliver new products and services.  Identify, understand, select from and connect to the wealth of available external knowledge.  Fill in the missing pieces of knowledge not being externally developed.

26. 2.2.4. Strategic Management Tasks Managing Venture Capital (VC)  Conceive start-ups as:  Small series of small laboratories that can guide the technological strategies and the market directions of large firms.  Relate in the following ways with young start-ups to explore potential areas of future interest :  Help in their funding  Acquire the most promising ones  Utilize them as paths to new markets for technologies that might otherwise sit within de laboratories.

27. 2.2.4. Strategic Management Tasks Managing Intellectual Property (IP)  Use IP to advance your own business model and profit from your rival’s use.  Do not relegate licensing decisions and patent protection to the legal department.  Regard IP as an integral part of technology strategy.  Manage IP at the strategic level within the company.  License extensively to create and extend markets for the technology created in the company.

28. 2.2.4. Strategic Management Tasks Managing Architectures of systems  Architectures are organizations of many parts with the connections between them.  Are used to organize the parts to create useful systems.  Key issues for R&D in relation to architectures:  Understanding the relationships between the parts of a system  Understanding the system as a whole  Reducing interdependencies between parts and complexity  Create opportunities for others to contribute with their expertise to build the system.

29. 2.2.4. Strategic Management Tasks Managing People  Internal Researchers  Give researchers rotational assignements in areas that interact with external participants outside the company.  Customers  Have important information that can be vital to open innovation.  Are innovators themselves  May use the technology in ways never expected by its designers.  Use this feedback to learn.  Conceive them as partners and coproducers.

30. 3. A comparison between the Open Innovation Paradigm and the Closed Innovation Paradigm

31. 3. Comparing the CIP and the OIP Different perspective to compare CIP and OIP  Contrasting principles  Comparing the environment around organizations  Comparing knowledge flows Validity of internal R&D and CIP

32. 3.1. Contrasting principles Closed Innovation PrinciplesOpen Innovation Principles The smart people in our field work for us.Not all the smart people work for us. We need to work with smart people inside and outside our company. To profit from R&D, we must discover it, develop it, and ship it ourselves. External R&D can create significant value; internal R&D is needed to claim some portion of that value If we discover it ourselves, we will get it to market first. We don’t have to originate the research to profit from it.

33. 3.1. Contrasting principles Closed Innovation PrinciplesOpen Innovation Principles The company that gets an innovation to market first will win. Building a better business model is better than getting to market first. If we create the most and the best ideas in the industry, we will win. If we make the best use of internal and external ideas, we will win. We should control our IP, so that our competitors don’t profit from our ideas. We should profit from others’ use of our IP, and we should buy others’ IP when ever it advances our own business model. (… continued)

34. 3.2. Comparing the environment around organizations Closed Innovation ParadigmOpen Innovation Paradigm Largely internal ideas Many ideas exist Low labor mobility High labor mobility Little VC Active Venture Capital Few, weak start-ups Numerous start-ups Universities unimportantUniversities are important

35. 3.3. Comparing knowledge flows

36. 3.4. Validity of internal R&D and CIP Is internal R&D obsolete ?  Not at all. Internal R&D is still important and relevant when companies structure themselves to leverage the distributed landscape of knowledge.  New roles:  Access and integrate external knowledge. Combine them in a timely way, creatively combining them to deliver new products and services.  Identify, understand, select from and connect to the wealth of available external knowledge.  Fill in the missing pieces of knowledge not being externally developed.  Design new architectures.

37. 3.4. Validity of internal R&D and CIP Is the Closed Innovation Paradigm obsolete ?  In some industries, it is still valid:  Mainframe computers  Nuclear reactors

38. 4. Conclusions: What can we learn about The Open Innovation Paradigm ?

39. 4. Conclusions Lessons for three types of actors in the OIP:  Managers  Entrepreneurs  Researchers, engineers

40. 4.1. What can Managers learn about OIP ? The business environment has changed, new principles should be adopted to survive. Resources should be managed following these principles.

41. 4.2. What can Entrepreneurs learn about OIP ? Knowledge is abundant; there are lots of ideas and funds to create new companies. To innovate it is not necessary to have huge R&D laboratories.

42. 4.3. What can Researchers and engineers learn about OIP ? Companies are eager to fund promising projects. It is easier to move from one company to other. Nowadays it is important collaborate with researchers from outside centers and countries.

43. 5. Final Remarks The model was conceived and defined by using the business environment of the U.S. Before adopting the model in a non-U.S. country; this should be considere before adopting the OIP in non-U.S. countries. Famous companies that adopted the OIP:  From CIP to OIP: IBM  OIP: Intel  Creating new ventures out of internal technologies: Lucent Technologies

44. 6. Questions / Answers Any question ?