Opening Up Your Innovation

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Hello and welcome to the 10th edition of the HBR IdeaCast, a BI weekly audio show from Harvard Business School Publishing. My name is Paul Michelman. I'm an executive editor here and I'll be your host. Our IdeaCast today contains two segments. In our first segment, we're joined by Harvard Business School Press senior editor Jeff Keough and author Henry Chesbrough for a look at Chesebrough's model for open innovation in today's information rich environment. Chesbro tells us companies can't afford to rely entirely on their own ideas to advance their businesses, nor can they restrict their innovations to a single path to market. As a result, Chesbrough says the traditional model for innovation, which has been largely internally focused and closed off from outside ideas and technologies, is becoming obsolete. In this segment, you'll learn more about Chesbrough's vision for the future of innovation and how your company can put it to use. And in our brief second segment, we offer up a bit of guidance for how to deal with underperforming employees. So set your cue, phone on silent, and prepare yourself for some innovative new ideas. First up, Jeff Keough and author Henry Chesebrough on the future of innovation.

Okay, we're really pleased to be here with Henry Chesebro, author of Open Innovation, and we're going to talk about innovation. So let's get right down to it. Henry, probably most people listening here now think that they know what innovation is. What's your definition of innovation?

Well, in casual conversation, people often mix the words invention and innovation together as synonyms, but in my mind, they're really quite different. Invention is the discovery of something new that we didn't know before. Innovation is actually taking something into the marketplace and solving a real problem with it. So that separate, once you separate those ideas, you realize you can be very inventive without being innovative. And you can actually be innovative without being particularly inventive.

That makes sense. And following from that, just trying to be a little bit more concrete for listeners. What do you see then as the primary business benefits of innovation as you define it?

Well, innovation has got to solve a problem in a market, so you're not done until it's in the market doing some good. The business benefits can come in one of two ways. One way is it can actually help you cut the costs of doing what you're doing today. So it actually improves your bottom line by reducing expenses. The. But the other business benefit, and the one that I'm seeing more these days, is growth. In particular, organic growth. Not the growth through acquiring other things, but growing new business streams, new product lines out of the technology and resource bases you already have.

Moving up to the topic of your book, what do you mean then by open innovation? How is that different?

Well, most of the last century, innovation meant doing it all yourself, so that if you wanted to be a great innovative company, you thought of companies like Bell Laboratories or IBM, where these companies were deeply integrated from back to the basic materials, all the way through to the final distribution to the end customer. And everything in between was done within the organization. And that's the mental model that is still in our textbooks today. The way that we think about innovation, open innovation says, you know, in this world Today, in the 21st century, in the day of the Internet and all this dispersed knowledge all over the globe, it's just too expensive to try to do everything yourself. And instead, much better to be open to. Either build on ideas of other people or in other cases, let other people use your ideas.

What are the new opportunities now for companies in this environment? And what are the new risks or dangers in this environment?

Let's see. Let's start with some of the opportunities and then move to the risks. Some of the opportunities are it really is a more global market for innovation, for technology, for opportunities. I see large companies building research labs in places like Finland and Israel and Taiwan, of course, India and China, trying to access not just low cost labor, but knowledge and training and capability that's emerging there faster in many cases than in the US itself. Another thing I see is I see startup companies at their inception with somebody from the US and somebody on the founding team who's based in Israel or India or China or Korea. They typically met at graduate school and maybe worked together for a while, and now they're doing their own company and from birth they're a multinational company, even though it might be a handful of people. So it's a very globally networked set of startups. So that means it's pulling on resources and ideas from all over the world. So those are some of the opportunities. Now, some of the risks I would point to are that I think these days intellectual property becomes a key source of friction if it's not carefully managed, because people who are building on each other's ideas, if you stumble over something that you don't actually have legal access to, somebody who either creates it or who buys it from somebody else could actually get in the way and block you. Like the RIM BlackBerry case we had recently where this small company acquired some of these patents and won a judgment for many hundreds of millions of dollars for a technology that was critical to the BlackBerry.

Do all companies need to be open innovators all the time? Are there situations or sectors where maybe a more closed model makes sense?

Yes, I think that's actually a good way to think about it, is that it isn't a matter of all open all the time, but where to be open and how to be open. Even IBM, a company that I give a lot of credit to for being much more open these days in their use of Java and Linux and some of their other activities, donating software patents to open source foundations and the like. That same IBM in the mainframe business is about as closed as it ever was and of course licenses a bunch of its intellectual property for a lot of money too. So it's not a matter of giving everything away for free all the time. It is a matter of sort of choosing your spots and figuring out where you can best leverage things. Having said that, I think most companies that I've encountered would do better to be more open, that if their center of gravity right now is still anchored in that earlier model, and for most of them they need to be more open as opposed to less.

Yes. And following that line, I want to try to get a little more practical and concrete now. So if there's a company that needs to become more open, what's the first thing that they can do to figure out how open or closed they should be when it comes to innovation?

Well, one thing I do in workshops with companies is I'll ask them to just list the major ideas that have come into their industry in the last five or 10 years and we'll just write them down and then we'll go back over each one and say, where did that come from? And just in their own industry figure out where have the sources of innovation been recently? And I find in many cases that a surprisingly high percentage of really game changing ideas that have come into big industries didn't come from the current players, but actually came from somebody out of a university or a startup company, or some overseas competitor from a different country that was attacking things a different way. And if once we've established that that's where the pattern has been in the recent past, then we can look at, well, what are we doing today in your company to identify the future sources going forward? If the recent future is going to be like the recent past. How well positioned are you to tap into those things?

I see. That makes me wonder the way you say, you know, don't just stick in your sector or industry. Look around. I wonder then, does open innovation work differently in your experience in different contexts or sectors? I mean, it seems easier for me to imagine how it might work in a high tech or biotech company, but does it work? And how might it work at a consumer goods company?

Yeah, it's an excellent question. This is one I wondered about myself because a lot of my research was done in high tech companies. And so you have to be honest and say, gee, I wonder if it really does work other places if you haven't really studied it yourself. And to my great delight, I've actually come to know more recently some packaged goods companies, consumer products companies, that have really embraced these ideas. So Kraft Foods, for example, has a woman who is the senior vice president of open innovation. Procter and Gamble was in the recent Harvard Business Review article. In March of this year. 2006 had a lead article on what Procter and Gamble was doing to bring external ideas from outside into P and G and launching new brands for things like household cleaning products or toothbrushes, things like this. These are not exactly super technology categories. And yet P and G is finding it's delivering tremendous growth and profitability for them to be much more open about these things.

That's interesting. Switching now in terms of different kinds of companies taking on these ideas and taking on a more open model. Again, in your experience working with these different kinds of companies on open innovation, what are the most difficult challenges and obstacles that companies face in opening up?

Well, I think one challenge that a successful company faces is that success can be a terrible teacher in that you think because you've had a lot of success that everything you're doing is great and so there's no need to change. And in the R and D side, for example, this manifests itself in something we often hear as the not everything invented here syndrome. These are essentially proud scientists and engineers who are saying, hey, I don't want to use this from someplace else. I can do it better myself. Let me have some money and I'll prove it to you. They may or may not be right about that. But what's interesting is that in terms of time to market, if somebody's already got it, even if your team could go and take a year or two and do it even better, wouldn't you rather have a pretty good one right now? And then go with that rather than having an even maybe better one in a year or two. And of course, not all those projects always pan out. So one of the things about an open model is it actually can not only save you cost because you're partnering with other people who may have expertise. It can also save you time in terms of advancing your products to market faster. And it also shares risk because the other parties are bearing the risk. Of all the failed projects and dead ends that don't materialize, you only work with the ones that do work. So, yeah, you're sharing some of the rewards with them. So there's very much a sharing involved, but you're sharing the risks as well.

Yeah, that's very interesting. And that gives, you know, more of a sense of what you talked about earlier, of a kind of dark side to open innovation, some of the challenges. I know in the first book that you worked on open innovation, which I was very pleased to work with you on, you mentioned the business model as the sort of key or core component to effectively implementing open innovation. Can you say a little bit more about that?

Yeah. The companies, I think, that become successful do so through having a business model that converts technology and other inputs into economic value. And the business model really tells you what to look for and what kinds of things to be building upon. And implicitly, it also filters out things that don't fit with your current business. So in the research I did on Xerox, they were making copiers and printers and were doing an excellent job of finding new technologies that would make those things go faster and faster with clearer and clearer images. Where Xerox ran into trouble was when they came up with a bunch of computer technologies in one of the research labs called Palo Alto Research center, or parc. And there these technologies really weren't helping copiers and printers go much faster. They weren't really improving the image quality either. And so Xerox, in its business model, had really no way to make effective use of these things. So in 30 of 35 projects I studied, they actually let the project go out and gave it a license to go out. And when those things did go out, they had to find a different business and a different business model if they were going to become successful. And many of them did not become successful, but 11 of them did. And they are today companies we know as 3Com, Adobe, VLSI technology, Spectra, Diode Laboratories, Documentum, an impressive list of companies that any venture capitalist would sell his mother to have. And so the effect was, and the lesson I took from this is that when you have these ideas and technologies, you need a business model that's going to convert them into value. And every good company has a business model, but it's only going to take it in a certain direction and it might miss opportunities in other areas.

What's the future of innovation look like to you and what should companies be anticipating or watching out for in the coming years?

Well, I think one dimension of it is I don't think the global aspect is going away. I think we're going to see more and more of that for the foreseeable future. And that means companies processes are going to have to reach out more and take more account of that. And unfortunately for many of us that probably means even more time on airplanes than we're already spending, which is probably no great thing. And if we can advance some technologies to do true video conferencing and other things that will save that, that'd be a big help. I think another thing that you're going to see is continued experimentation with working between companies and universities that I think universities are becoming more and more central to particularly the long term dimensions of innovation that most large companies I know are really getting out of the basic research business and they're really leaving that more and more to the universities. And that can be okay if we can figure out the right partnerships between industry and academia to make that work. That's the second thing I see. The third thing I see is that in the area of intellectual property, companies that want to innovate are going to have to become much more sophisticated about how they run their intellectual property activities as well. Either defensively so that they can keep doing what they've been doing and be effective and increasingly I think offensively. So they can either enter new areas, negotiate better terms with suppliers or customers, or maybe even raise some additional funds from others who might be using practicing these technologies that might benefit them.

Okay, well that makes a lot of sense. We need companies need better offense and defense when it comes to engineering, innovation, intellectual property. Well, Henry Chesbrough, I want to thank you very much for being with us here today.

Well Jeff, thanks very much.

To learn more about Henry Chesbrough's ideas, you can pick up a copy of his book Open the New Imperative for Creating and Profiting from Technology, available in paperback this fall. Next up, managing underperformance. Dealing with underperforming employees is one of the most difficult and frankly unpleasant tasks any manager faces. There's no escaping the fact that addressing poor performance requires the kind of confrontation that most managers would rather avoid. But you really have no choice. A lackluster employee can drag down an entire department if you're not careful, or at least make everyone else's work life all that much more challenging. And in any truly competitive environment, you simply can't afford to be paying people who aren't producing value for you. So what to do about poor performance? Well, it all depends on the nature of the problem and the person involved. Does the individual have a history of performance problems? If so, you may need to take punitive action. But dealing with employees who are not chronic underperformers is even more challenging. You have to call them on the quality of their work, and if you don't, the chances they'll improve are diminished. But how do you do it in a way that is supportive and positions them to succeed? Consider this approach. Step one Lay out your opinion and support it with specifics. Begin by having an honest conversation with the employee. To soften the blow, start the conversation by saying something positive about the employee's value to the company and past performance, and then transition into your view of his current work. It's important to support your opinion with specific examples, but be careful not to go overboard. You don't want to come across as overly severe. Step 2 Allow your employee to offer his perspective. Once you've carefully laid out your perspective, allow the employee to offer his own point of view. Perhaps he'll agree with your assessment and offer an explanation of some kind, but be prepared for some pushback as well. It's not easy to hear criticism and and some people are inclined to fight it. However, it pays to be open minded. It may be that the employee legitimately disagrees with your assessment and can explain why. Maybe there is some kind of communication problem concerning expectations at work here. Step 3 Determine and measure the performance gap. Once both you and the employee have had an opportunity to speak, you need to focus on the gap between your expectations and the current level of the employee's work. Try to quantify as best you can what the gap is so you can then build a plan to close it. Step 4 Come to an agreement on how you will close the gap. Performance improvement requires a plan of action that both you and the employee have agreed upon. Make the plan a detailed one, incorporating specific tasks and milestones. Also, be clear on the ramifications of the employee not meeting those newly established expectations. And Step five Schedule a regular meeting to review progress. Turning around performance isn't always easy, and if you care about seeing the employee improve, you need to commit to helping and supporting him along the way through regularly scheduled discussions. We hope you've enjoyed this edition of the HBR IdeaCast. If you have any comments or ideas you'd like to share about our program, please send them to my attention. That's Paul Michelman at this address, ideacast bsp harvard.edu and if you'd like to catch up on our previous ideacasts, please visit us at our new home on the net, www.hbrideacast.org. thank you, and we hope you'll join us again soon for our next IdeaCast.