Digital technologies radically change the way companies do business. Those businesses that fail to adapt will fall behind. How can organizations set out their new growth strategies? How can they leverage open innovation for this purpose?
To address this question, the Fujitsu Executive Forum was held at the Peninsula Tokyo on May 18, 2018. The event, titled "Transforming your business through co-creation: Latest movement of Open Innovation," featured two guest speakers: Henry Chesbrough, Adjunct Professor and Faculty Director at the University of California, Berkeley, known as the "father of open innovation," and Andrew Fursman, co-founder and CEO of 1QBit, a quantum computing software company in Vancouver, Canada. This article reports on the session during the forum.
Open Innovation and Business Transformation
In 2003, Chesbrough published his first book, Open Innovation: The New imperatives for Creating and Profiting from Technology. He described the concept of open innovation in this book before any other researcher had noted its rise. Interest in open innovation has grown dramatically since the book first hit the market, and now the concept is widely implemented in business.
Chesbrough compared open innovation to the traditional way of innovation generally taking place in companies. This is usually a closed process, with work mostly done by internal R&D departments. Original ideas often end up on the shelf, unused.
Chesbrough illustrated the closed process with an image of a funnel turned on its side. Many research projects enter the funnel from its wide-open mouth, but only a limited number of finished products or technologies come out through the narrow opening at the other end.
He explained that, on the other hand, open innovation could be depicted as a funnel with a number of holes on its wall, through which knowledge and technologies flexibly pass in and out. There are two types of knowledge flows--the outside-in and the inside-out.
"If we have a business model that will benefit from other people's knowledge, we will find ways to access that knowledge and bring it in," he said. "If we have internal knowledge that is not going to be used by our organization, we might allow that to go outside for others to access. Open innovation allows both sides to productively utilize others' knowledge."
He further compared the open-innovation model with Michael Porter's concept of the value chain that was described in his book, "Competitive Advantage."
According to Porter, a competitive advantage for a company is derived from the value chain. It is a series of internal processes adding value to products.
But customers are absent in the value chain, Chesbrough pointed out. From his perspective, innovation today must have customers at the center, and he calls this innovation model, "service value web," against Porter's value chain. "Instead of a value chain, I would propose a services value web that is not a linear process but is instead an iterative process and at the center of this process is the desire to create a superior customer experience," he said.
Chesbrough noted that this is not a new idea. There have been predecessors who emphasized the importance of customer value. Peter Drucker is one. A colleague of Michael Porter from Harvard, Ted Levine, also expressed this quite vividly, saying, "When a customer buys a drill to make a hole in the wall, the drill is the product but the utility is the hole that you achieve by using the drill."
Chesbrough further developed the argument for customer value by questioning whether the ownership of physical assets really pays off in the digital age. "Being a good American from California, I also own a car," Chesbrough remarked. "I drive my car about 12,000 miles a year, about 400 hours each year. A year has more than 8,000 hours, so I am using my car less than 5% of the time. But I paid 100% of the taxes, the fuel, the service and other expenses." Chesbrough suggests that it would be more economically sound if we paid only as much of an asset as we used. That is, we do not own the asset but are allowed to use it as a service.
GE and Rolls Royce, for example, lease jet engines in a program called "Power by the Hour." It allows airlines and other users to take the asset (a jet engine that would cost tens of millions of dollars) off of their balance sheets and put it back on their supplier's balance sheet. Thus, a fixed cost is transformed into a variable cost, said Chesbrough.
"Amazon Web Service is another example," he said. "Instead of paying 100% of the server costs, Amazon will now rent out access to its infrastructure to customers and that again spreads the fixed costs over more volume and lowers the cost for the customers."
Chesbrough counts this service-oriented externalization of internal assets as a key aspect of open innovation. The strategy attracts more business users to Amazon's digital platform and gives Amazon strong advantage in the market, he pointed out as he showed a graphic that compares Amazon's API ecosystem with that of rival Walmart. The graphic shows 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.
In what Chesbrough calls "open service innovation," many venders and partners work together to improve customer value. Here it is important for a company to consider its business as a service, putting customers at the center in the "co-creation" process. Outside-in helps with economies of scope and the one-stop shop idea, without taking risks in sales or inventory. Inside-out helps with economies of scale, too, sharing those fixed costs over more transactions, more activity, Chesbrough noted.
Toward the end of his speech, Chesbrough introduced Open Innovation Gateway - Powered by FUJITSU (OIG), one of Fujitsu's open innovation initiatives in Silicon Valley. Chesbrough has been supporting the initiative since it was in the planning stages. "OIG focuses on how to open up the possibilities for co-creation at a pace of start-ups with customers, talented individuals and progressive institutions in Silicon Valley and beyond. So, it redefined the way companies collaborate for innovation with faster processes," said Chesbrough.
As an example of applying co-creation to a business model, Chesbrough briefly introduced a case study of a major Japanese life insurance company. The company worked with professionals in Silicon Valley and customers from the early planning stage to proof of concept and successfully delivered a new concept. "It's too soon to say it's going to be a great big new business, and it's not too soon to say it's deepening the dialogue between the customer, the life insurance company and Fujitsu," he said. "They are all learning new things about each other and about the opportunities in the market."
In closing, Chesbrough cited three key tips for companies pursuing open innovation:
- Focus on customer value more than products or technologies. Do not rely on market research and customer surveys but engage with customers to learn what they truly want.
- Share high fixed-cost internal assets, including brands, distribution channels and the pool of patents to accelerate growth.
- Explore new opportunities outside your current business model, taking a lean start-up approach with small-scale proof of concepts. In order to achieve this, build an organization capable of quick decision-making and leverage knowledge from customers, start-ups, universities and other outside experts.