A Growth Strategy for the Digital Age: The Key is 'Open Innovation'

"Most innovations fail. And companies that don't innovate die." So wrote Henry Chesbrough in the introduction of his first book, published 15 years ago. The faculty director of the Garwood Center for Corporate Innovation at the Haas School of Business, University of California, Berkeley, Chesbrough was the first researcher to systematically develop the concept of "open innovation." Chesbrough, the "father of open innovation," talked about the open innovation strategy for achieving corporate growth.
(Fujitsu Forum 2018 Report, special session)

From Closed to Open Innovation

Professor Chesbrough started his speech by looking back to the time of his first book.

"In 2003, when I published my first book, I did a search on Google using the term 'open innovation' and got back about 200 links. As I read through each of these links, what had happened was there was an article or a story where the word 'open' and the word 'innovation' had appeared in the same sentence. If a company had opened an innovation office in the city, that would be one of the links. Ten years later, I did the same search using the same term on the same search engine. This time, I got back more than 400 million links. It was clear from reading through those results that this concept of open innovation had really taken form, and it really started to grow."

To explain the concept, Chesbrough showed an illustration of a funnel turned on its side, which he said represents a company's innovation process.

Companies traditionally have pursued innovation through internal laboratories or R&D centers. But not all of the projects or ideas developed internally have made it out to the market. On the contrary, most of them have been abandoned or sat on the shelf because they did not work for the companies' core businesses.

"Projects get launched by an organization, and they proceed through the process to the markets. In this model, there's only one way into the process from your own science and technology base, and there's only one way out of the process to the market," said Chesbrough.

"Though this traditional process of closed innovation may still be effective for some companies, it has evolved," he continued, showing an illustration of the same funnel but with a number of holes in its wall.

"There are two important flows of knowledge in the innovation process," he said. "The first important flow is the outside knowledge flowing into the organization's innovation activities. This is a very useful, powerful way to add to the internal knowledge in technology that you already have and supplementing that with additional knowledge. That is the outside-in. The other set of flows shows the inside going out to others. Internal ideas that don't go forward internally might be allowed to go outside for others to use in a spinoff or a license. If they find a product market fit with the customer, we have the option to bring them back in again like a boomerang."

Chesbrough called this model "open innovation."

Innovation Network with Customers at the Center

Chesbrough then took it a step further to explain what he calls "open service innovation."

"You need to practice open innovation with a service-oriented mindset, rather than thinking innovation with a product-oriented mindset," said Chesbrough. He also espoused the value chain framework of Michael Porter to explain the importance of this shift in mindset.

"In a book he wrote over 30 years ago, called Competitive Advantage, Michael Porter described ways that companies can win against their competitors and build a competitive advantage," said Chesbrough, showing a slide of Porter's diagram of the value chain.

"As you look at this diagram, you notice that the ideas and projects come in, go through the internal process and then go outside to the markets, from the inbound logistics through the operations, to the outbound logistics, to the marketing and sales people and (finally) to the service. And all of this is supported by overhead functions inside the company. This was a way that companies could build their competitive advantage.

"But if you take a closer look at this, you will notice that the customer is really not represented in any of these functions. If the organization is well-managed, the customer did give us requirements at the beginning and the customer does take delivery at the end. But throughout the value chain, they had better not have changed. We sort of freeze the customers' requirements to activate this model," said Chesbrough.

Against Porter's concept of the value chain, Chesbrough puts emphasis on a customer-centric framework of innovation, which he calls "Service Value Web."

"A better way to think about (open innovation) is to put the customer, more specifically, the customer's experience, in the center of our activities. That involves engaging with our customers, co-creating with them to unlock the tacit knowledge from both ourselves and our customers to create new possibilities," Chesbrough said.

He also noted that putting the customer experience at the center of innovation activity is not a new idea.

"Peter Drucker said that when a customer buys a product, what the customer is actually buying is the utility of the product or what the product does for them. A colleague of Michael Porter at Harvard Business School, Ted Levitt, expressed this quite vividly, saying that when you buy a drill to make a hole in the wall, what you want is not the drill but the hole that the drill will make," Chesbrough pointed out.

This represents a shift from the product to the customer value or service. Chesbrough counted Uber and Airbnb as companies that exemplify this shift. They are rapidly growing by delivering services to their users, not owning physical assets like cars or hotels.

After he shortly touched on "Open Innovation 2.0," an ecosystem-based multiparty collaborative system in Europe, where businesses, universities and government organizations work together to deliver value to a society, Chesbrough took up the trend of the growth of digital platform businesses and how they support the open-innovation model.

Among companies representing this trend is the giant e-commerce and cloud-computing company Amazon. The more partners and users that support Amazon's platform, the more attractive, and therefore successful, Amazon becomes in the market, noted Chesbrough.

"The company had to work hard to grow and scale its IT to keep up with the demand from consumers for its own website. Amazon's founder and CEO, Jeff Bezos, made it externalizable and available to outsiders through APIs. They created the foundation for what is one of Amazon's biggest and most profitable businesses today, Amazon Web Services," said Chesbrough.

Then, he showed a slide that illustrates the success of the API strategy. The graphic compares Amazon's API ecosystem with that of its strongest competitor, Walmart. We can clearly see Amazon's API users growing to dominate the space while Walmart's API users are driven to one corner. "If you are Walmart, this suggests you have a real problem you need to think about," said Chesbrough, emphasizing that a company's management should think of their business as a service.

"We think about the physical assets to deliver services, as I showed you some examples of companies that are delivering services using other people's assets. That's perhaps the best utilization of all because it's other people's money and other people's assets that you are packaging and delivering as services," he said.

Open Innovation by Japanese Companies

Chesbrough also introduced Fujitsu's Open Innovation Gateway (OIG) in Silicon Valley as an example of a Japanese company's efforts in open innovation.

OIG collaborates with professionals in Silicon Valley to discover new possibilities. Chesbrough pointed out that in co-creation projects, the key is in how a company works with others with an open mind, because "not all of the smart people work for you in your organization."

OIG is also helping customers' decision-making processes. "In many large companies, it takes a very long time to make decisions. 'We had a meeting, and the decision was to have another meeting.' This is very hard for start-ups," said Chesbrough. "Though it looks as if the trial-and-error approach requires tremendous efforts, it turns out to be effective especially when you engage in co-creation with start-ups. OIG's Fast innovation approach is helping many customers."

During his speech, Chesbrough introduced a few examples, including OIG's collaboration with a major Japanese life insurance company. Chesbrough also introduced Fujitsu's education business unit's collaboration with a Canadian start-up.

Transformation into a Smart Village

Lastly, Chesbrough shared an open innovation case study of a small village in Andhra Pradesh, India, called Mori with about 8,000 people.

"The village had very little money, very poor residents. The main industry in this village was shrimp farming. But one of the problems the residents had was that the quality of water used for the shrimp farming was variable. This would require the whole crop to be abandoned," explained Chesbrough.

"One of the hypotheses was that government grants and charity typically don't scale and sustain over time. Instead, if companies are investing for their own growth in profitable business, capitalism itself can be harnessed to grow and sustain the discoveries. So, an open-innovation project was started.

"The project attracted more than 40 companies to co-create a business model that transformed the poor village into a smart village," he said. "An internet infrastructure was built there. Sensors were installed around the farming pool, which enabled villagers to monitor the quality of water, and when the quality went down, they could refresh the water. These initiatives were proven effective and resulted in higher profitability in farming. Then, based on the pilot, the decision was taken to expand to over 300 villages," said Chesbrough.

He summed up his presentation by asking a fundamental question. What is open innovation?

"When you look for the answer to the question, you might hear of many methodologies. But in the end, I believe open innovation means a mindset - a mindset that is much more open, much more engaged with the outside world, as well as the inside world."

At a special session during the Fujitsu Forum Tokyo 2018, Yoshikuni Takashige, Vice President of Marketing Strategy and Vision at Fujitsu, introduced Henry Chesbrough and moderated a Q&A session. The full text of the report on the session is available on the following website: