Creating value through collaborative innovation strategies

1. Creating value throughcollaborative innovation strategies Lorenzo Boscherini Lorenzo.boscherini@polimi.it

2. Case history: Procter & Gamble 2

3. Case history: Procter & Gamble 3

4. Case history: Procter & Gamble • Proprietary networks: • Technology entrepreneurs • Suppliers’ network • Open networks: • NineSigma • InnoCentive • YourEncore • Yet2.com • Eureka Catalog • Cultural change “For everyone of our 7’500 P&G researchersthere are 200 scientists or engineers elsewhere in other parts of the world who are just as good – A total of perhaps 1,5 million people whose talents We could potentially use” L. Huston VP for Innovation and Knowledge, P&G 4

5. Case history: Procter & Gamble • Questions for discussion: • What factors required or encouraged P&G to revolutionize its approach to innovation? • What advantages has the Connect & Develop approach for P&G? • What barriers had P&G to overcome to make Connect & Develop work? 5

6. Lessons learnt:factors encouraging collaborative innovation • Rising costs of innovation development • Shortening life cycles of innovations • Development of technological and social infrastructure • Rise of active users • Acceleration of knowledge production • Global distribution of knowledge 6

7. Lessons learnt:advantages of collaborative innovation • Lower time and costs to generate innovations • Lower risks in the generation of innovation • More profitable innovations • Stronger internal growth 7

8. Lessons learnt:barriers to collaborative innovation • Not-Invented-Here (NIH) syndrome • Lack of absorptive capacity • Loss of control over core competencies • Crowd-sourcing and organizational complexity 8

9. Lessons learnt:overcome barriers to collaborative innovation • Not-Invented-Here (NIH) syndrome: • It should be removed by working on culture, rewarding and incentives • Lack of absorptive capacity: • Open Innovation is not mere outsourcing … • Loss of control over core competencies: • IP management and partner selection should be given high priority • Crowd-sourcing and organizational complexity: • ICT knowledge management systems could be used to organize information 9

10. LECTURE 2Innovating the innovation process:the Open Innovation paradigm lorenzo Boscherini Lorenzo.boscherini@polimi.ti

11. Agenda • Open Innovation: a new paradigm for the management of innovation • The Innovation Chain in an Open Innovation era 11

12. New approaches to the management of innovation 12

13. Which are the key features of these new approaches? • Systematic search for external sources of technology and in-licensing opportunities • Establishment or access to existing networks to better monitor customer needs and technology developments • Opening up of proprietary systems and standards to leverage development made by the open source community • Systematic search for external opportunities to exploit internal knowledge • Adoption of an offensive rather than a defensive approach in managing intellectual property, by focusing on licensing IP to outside parties • Use of ICT systems for collecting data and information from everywhere within and even outside the company • Maintaining or strengthening of internal R&D and innovation capabilities (e.g., P&G, Italcementi) • Creation of dedicated organisational units to centrally manage relationships with external actors (e.g., Timberland, DSM, Italcementi) • Introduction of ad-hoc structured processes for the evaluation of ideas acquired from external sources and for the evaluation of exploitation opportunities (e.g., P&G, BMW) 13

14. “Traditional” paradigms of innovation management Complexity Systems integration and networking Coupling Model • Fully integrated parallel development of product and process • Customer focus and close coupling with leading edge customers • Strategic integration with primary suppliers • Integrating R&D and Marketing Market Pull Technology Push t ‘00 ’60s ’80s ’90s II generation III generation IV generation I generation 14

15. “Traditional” paradigms of innovation management • A constant feature of all “traditional” paradigms of innovation management is the way companies pursued innovation within their boundaries • They invested heavily in internal R&D and hired the best people, enabling them to develop the most innovative ideas and to protect them with IP strategies • The generated profit was used to reinvest in internal R&D in a virtuous (but closed) circle of innovation Innovation projects Market € € 15

16. Towards a new paradigm of innovation management • In the last years, however, two major factors challenged this closed model of innovation: • the rising cost of technology development in many industries • the shortening life cycle of new products • The cost of building a semiconductor fabrication facility in 2006 is nearly 3 $ billion … it would have cost nearly 1% of that in 1986 • The cost of developing a new drug is currently well over 800 $ million, up more than ten-fold from the mid of 1990s 16

17. Towards a new paradigm of innovation management New markets Innovation projects Established markets • Companies are increasingly rethinking the fundamental ways in which they generate ideas and bring them to market – harnessing external ideas while leveraging their in-house R&D outside their current operations • The boundaries between a company and its surrounding environment are more porous enabling innovation to move easily between the two • Henry Chesbrough named in • 2003 “Open Innovation” • this new paradigm of • innovation management 17

18. The new Open Innovation paradigm • The Open Innovation paradigm: • attacks the cost side of the problem by leveraging external sources of innovation to reduce time and money in the company’s innovation process • attacks the revenue side by increasing “market” chances 18

19. Innovation management paradigms Complexity Open Innovation Systems integration and networking Coupling Model • Fully integrated parallel development of product and process • Customer focus and close coupling with leading edge customers • Strategic integration with primary suppliers • Integrating R&D and Marketing Market Pull Technology Push t ’00s ’60s ’80s ’90s II generation V generation III generation IV generation I generation 19

20. The BASF innovation model Outbound Open Innovation Inbound Open Innovation (source: www.basf-futurebusiness.com)

21. The Open Innovation philosophy

22. Agenda • Open Innovation: a new paradigm for the management of innovation • The Innovation Chain in an Open Innovation era 22

23. The Innovation Chain Scouting and idea generation Evaluation and screening Innovation development Innovation exploitation • Each phase of this strategic planning process requires a new approach under the Open Innovation paradigm … 23

24. Increase involvement of users, also in consumer markets Innovative forms for the involvement of users (e.g., on line communities) Use of corporate venture capital to monitor the evolution of promising technologies Innovative approaches to partner with Universities Idea generation Scouting and idea generation Evaluation and screening Innovation Development Innovation Exploitation 24

25. Involving (lead) users: the case of Hilti • Hilti AG, an European manufacturer of construction components and equipment experienced a lead user integration into the innovation process for its development of a pipe hanger (a steel support that fastens pipes to walls or ceiling of buildings) • The company first identified among its customers, using phone interviews, lead users (those who were ahead of market trends and expected to benefit significantly from the new solution) • The lead users were invited to participate in a three-day product concept generation workshop to develop a pipe hanging system that would meet their needs. At the end of the workshop, a single pipe hanger design was selected as the best in meeting user needs 25

26. Involving (lead) users: the case of Hilti • The company then presented this design to 12 routine users not involved in the workshop but with a long relation with the company • Ten out of 12 routine users preferred the new design to previously available solutions, and they would be willing to pay a 20 percent premium price for the product • Not only, therefore, the project was successful, but the lead user method was also faster and cheaper than the conventional market research methods the company used in the past. Hilti’s typical process took 16 months with a cost of 100.000 $, whereas the lead user method took 9 months with a cost of 51.000 $ 26

27. Involving users in consumer markets: the case of Barilla • Barilla established a laboratory, named Villa Rosa, that continuously monitors customer trends and changing habits by directly involving consumers in Barilla’s innovation processes • Villa Rosa is an old mansion located at the Barilla headquarters in Parma. The building is rather unusual, consisting of six modern kitchens, that allow the consumers brought to Villa Rosa to feel completely at home. In this way, the company can collect data on consumer behavior by observing how their products and those of their competitors are used • Villa Rosa hosts nearly 10.000 users per year 27

28. Internet and web 2.0 • Internet and, in particular, web 2.0 have experienced a significant diffusion in the last years: • According to a McKinsey’s survey, 25% of internet users in Western Europe are used to publish on the web their comments and opinions about the products and services they have tried and used • The number of visitors of “user-generated” content web-sites grows at a 100% annual rate (compared with a 20-30% growth rate of traditional web-sites) • In less than 7 years Wikipedia has expanded to offer more than 6 million articles in 250 different languages 28

29. On line communities: the case of Adidas 29

30. Other examples: the case of Swarovski 30

31. Other examples: the case of DUCATI

32. Other examples: the case of DELL Dell IdeaStorm is launched in 2007 to allow Dell "to gauge which ideas are most important and most relevant to" the public. After registering, users are able to add articles, promote them, demote them and comment on them. Articles can also be demoted, and a "vote half life" system is used to stop older ideas which are no longer receiving votes from appearing on the popular ideas page. As articles are promoted, their score is increased, allowing Dell to rank which suggestions and requests are considered most important by the website's usersl

33. Other examples: the case of SAP SAP Developers Network, an online community whereany SAP developer or poweruser can askfellowmembers for support with an SAP software problem. The person with the problem awards points to the personwhosolvesit, and SAP postsat regular intervals the name of the top 200 contributorswhohaveearned the more points.

34. Corporate venture capital: the case of Intel • Intel started an independent business unit named Intel Capital, acting as a venture capital company with more than 100 investment professionals around the world • Up to 2007, over $ 8 billion have been invested into • more than 1000 companies • Intel Capital provide venture funds to three types of investments: • Ecosystem development investment, companies building technologies related with core products of Intel • Gap-filling investments, focused on technologies complementary to those of Intel and not sold directly • ‘Eyes and ears’ investments (about 10% of the total invested), centered on monitoring opportunities looking extremely useful, promising and profitable but also very challenging and risky 34

35. Porsche routinely collaborates with universities on projects for which it lacks the required expertise. Every year Porsche bring nearly 600 students (selected from 2,000 applicants) who are working on their Master Degrees into its R&D facility in Weissach (Germany) where they work alongside 2,000 staff engineers for four to six months (sometimes as much as 60 hours per week) An annul budget of up to $30 million finances paid internship for the students and also supports external university research studies conducted exclusively for Porsche Relationships with Universities:the case of Porsche 35

36. Although the student focuses on basic R&D, they participate in every stage of product development Interns are also engaged in commercializing their work: help Porsche identify new suppliers for the technologies they develop collaborate on production techniques Porsche offers its top interns (fewer than 10%) full time jobs. Those not asked to stay become part of an alumni network that provides advice on research and technology Alumni may meet several times a year, sometimes for a weekend in a castle in southern Germany or Austria, where they enjoy elegant meals and early test-drives of the company’s latest models Relationships with Universities:the case of Porsche 36

37. By in-sourcing student expertise, Porsche can explore more promising ideas and move them to production faster than its competitors This arrangement allows the manufacturer to employ just ten staff specialists in basic research, compared with about 200 each at BMW and Mercedes-Benz A student costs the company 15% of what a full-time employee costs Relationships with Universities:the case of Porsche 37

38. Open Innovation entails a higher complexity in the selection of: The innovation projects to be undertaken The partners to collaborate with Screening Scouting and idea generation Evaluation and selection Innovation Development Innovation exploitation 38

39. Selecting projects • The openness of the innovation system complicates the evaluation of innovation projects, which often involve significant technical and market uncertainty • Indeed, the openness: • increases the sources and number of new project ideas to be reviewed (crowdsourcing) • reduces (in comparison with internally generated idea) the degree of knowledge about the project ideas • increases the risk of adverse reactions to ideas generated externally (NIH syndrome) 39

40. Selecting projects: the case of P&G New Ideas Technology entrepreneurs Pre-screening • Which products, technologies or ideas meet P&G’s where-to-play criteria? Accepted ideas Ideas assessment Eureka Catalog Product development 1 out of 100 ideas reaches the market Accepted ideas General managers, brand managers, R&D teams, ... • Ideas in the catalogue are organised answering to the following questions: what is it? how does it meet our business needs? are its patents available? what are its current sales? • The catalogue’s descriptions and images are distributed through the company for the evaluation (general managers, brand managers, R&D teams,…) • Does P&G have the technical infrastructure to develop the idea? • What is the business potential of the idea? • ... Technology entrepreneurs may actively promote the idea to specific managers in relevant line of business 40

41. Selecting projects: the case of BMW Associates appointed by BMW in major technology research centers VIA – Virtual Innovation Agency Free Internet portal Innovation projects or ideas submitted by individuals, universities and other companies Regular reports on latest technology trends and innovations Technis BMW’s Central Intranet Database 41

42. Selecting projects: the case of BMW Innovation Strategy Board (BMW board members, innovation managers and corporate strategists) • Decides the direction of innovation in the company • Guides the innovation process • Periodically reviews the progress of innovation projects under all IFCs • Builds a cross-functionality between IFCs Innovation Steering Committee (all the members of IFCs) Innovation Field Manager Convenience and Services Innovation Field Manager Experience Dynamics Innovation Field Manager Safety and Security Innovation Field Manager Concept cars Innovation Field Manager Esthetics and Value Innovation Field Manager Environment Acceptance • Each Innovation Field • identified by the company • filters and selects ideas for potential development • assesses market potential of selected ideas • draws up price-estimates and financing limits • allocates resources Innovation Field Council (two or three senior managers) Innovation Field Council (two or three senior managers) Innovation Field Council (two or three senior managers) Innovation Field Council (two or three senior managers) Innovation Field Council (two or three senior managers) Innovation Field Council (two or three senior managers) Technis BMW’s Central Intranet Database 42

43. Selecting partners • Open Innovation requires to “think outside the box”, i.e. to search for solutions beyond the “traditional” network of customers and suppliers of the company • However, addressing a new field of knowledge as well as a new industry, requires new processes to evaluate and select potential partners 43

44. In autumn 2001, BMW introduced a completely new control concept in its new BMW 7 series: the iDrive is an innovative control device allowing drivers to operate various functions of their cars in an intuitive, interactive manner with a computer-like interface The project was initiated by the end of 1997. To realise the new control concept a number of technologies - new to the automotive industry – was needed: a computer-like screen, a multifunctional control element, MMI (man-machine-interface) software, computing capacities and reliable interfaces between the different components Selecting partners: the case of BMW 44

45. Increased heterogeneity and complexity of the network of inter-firms relationships Use of innovative forms for accessing external knowledge (e.g., onlinesolution networks) Innovation development Scouting and idea generation Evaluation and selection Innovation Development Innovation exploitation 45

46. Innovator Network: key issues • Open Innovation entails network relations with a number of external actors: Suppliers Universities Research centers Competitors Firms from other industries Service firms Clients 46

47. Network: the case of Nokia 47

48. Network: the case of Nokia 48

49. Network: the case of Nokia • In developing the new generation of mobile phones (UMTS) in the years 1997-2002, Nokia significantlyenlarged its network by: • collaborating intensively with competing mobile phone manufacturers such as Ericsson and Siemens (whereas Nokia hardly collaborated with its competitors in the period 1985–1996) • exploring new capabilities beyond mobile telecommunications • accessing new partners (nearly 50% of alliances in the period 1997-2002 involved partners completely new to the company) 49

50. Online solution networks: the case ofInnoCentive • The Solvers in the InnoCentive network involve, other than scientists in R&D labs and Universities, also non traditional pools of intellectual capital: • retired scientists and researchers • scientists and researchers belongings to industries quite far from that of the seeker • … • Traditional networks • Nontraditional pools of intellectual capacity 50