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.
'Symbiogenesis': How Small Start-ups and Large Organizations Can Co-Create
Following Chesbrough, Fursman, CEO of a Canadian quantum computing software company 1QBit, came to the stage. Last year 1QBit and Fujitsu began collaboration around the business of Fujitsu's latest computing technology, called Digital Annealer. He used nature as a metaphor to illustrate how co-creation could work.
"There are many examples within nature of large individuals and small individuals working together for mutual benefit, for example, symbiosis of trees and mushrooms in a forest," he said. "They collaborate for the health of the forest, in which sometimes trees deposit energy down into the mycelial structure of mushroom colonies in good times and then withdraw that energy back, not necessarily by the same tree but for the benefit of the entire community," Fursman explained.
Fursman pointed to another example of symbiosis in the human body. It is endosymbiosis of the mitochondria in host cells. He said. "Cells and mitochondria used to be individual organisms, but the smaller component, the mitochondria, which was originally external, came together and created something new where the endosymbiont became almost like an organ inside the larger organism. This helped cells function so successfully that you don't see cells with no mitochondria, and you don't find mitochondria outside of cells. Together they have come to build something that's much more successful than either of them independently to the point where they no longer exist independently at all."
Fursman called this successful unity of two organisms "symbiogenesis" and equated it with business co-creation between two companies.
Then, he recalled the year 2012, when he co-founded 1QBit. At that time, few people envisioned any practical uses for quantum computers. Still fewer imagined the need for software development kits for them.
"We saw a trend that was the slowing down of Moore's Law and the increasing of specialization in hardware processors," said Fursman. "We knew that it was very difficult to understand how to interact with all these different devices, and yet we understood that these devices would be incredibly powerful if connected to the appropriate industrial problems. So, we wanted to build the bridge between industry and these new types of hardware, and we knew that if we were to be successful doing this, we would have to start this project before the hardware existed."
This idea was a bold one, but Fursman said he was confident. "These companies which were developing quantum computers would be willing to partner with us once they had invented the hardware that we assumed they were going to be creating."
In fact, Fursman's client list includes the top names in the industry, one of which is Fujitsu. 1QBit has been collaborating with Fujitsu on the latter's quantum-inspired computing technology, "Digital Annealer."
"Fujitsu's Digital Annealer was exactly the sort of device that we had envisioned," said Fursman. The collaboration between the start-up and the established company inevitably encounter challenges, including differences in corporate culture, but Fursman is positive about the pairing producing results. He noted that Fujitsu and 1QBit had worked together with a higher goal in mind.
"When you imagine the partnership that we would have with this size of an organization, you may see it as unequal. But just like in nature, an unequal partnership can still lead to mutual benefit," Fursman said. "Although it's well-known that most start-ups will fail, large companies can't be complacent either. In fact, even the top 500 companies around the world are struggling for survival in rapidly changing business environments. We must find ways to support one another and to work together for mutual benefit."
Fursman said for co-creation to succeed, companies have to find alignment of their incentives. "That means when one company wins, the other company wins; when one company loses, the other company loses, so that there is really one-team mentality."
Lastly, Fursman noted that in Canada, universities are playing an important role in supporting large companies looking for start-ups to work with.
"Our relationship with Fujitsu was facilitated through a university, and many universities are starting to have special programs designed specifically to help start-ups to find partnerships with larger organizations," he said. "At the University of Toronto, we have the Creative Destruction Lab. The lab has already produced a very large number of companies in a small number of years. Though these companies are sometimes less of a company and more of a technology, they can work well inside a larger ecosystem or inside a larger organization. This business symbiosis provides real opportunity for success as we saw in nature."
In closing, Fursman said, "my message that I want you to take away is from the word symbiogenesis, which really means living together in order to create something new. I would love to have an opportunity to explore co-creation together."
Key Success Factors for Digital Transformation and Co-creation
Next up, Takashige, Fujitsu's Vice President of Marketing Strategy and Vision, talked about the key success factors for digital transformation, based on the analysis of a global executive survey Fujitsu recently conducted. He also explained Fujitsu's initiatives for co-creation.
In February Fujitsu conducted the survey of over 1,500 executives in 16 counties to explore success factors for digital transformation. "We found common characteristics about organizations that had delivered successful outcomes through digital transformation," Takashige said.
He pointed out six key success factors, comprising Leadership, People, Agility, Business Integration, Ecosystem and Value from Data. Takashige called these factors Digital Muscles. He emphasized, "These are different from the muscles that enterprises have already developed. To succeed in digital, enterprises have to build these new muscles."
On average, online companies are much stronger than traditional companies in their digital muscles. Especially, the gap is the most evident in the capability of developing "Ecosystem," which directly relates to co-creation, he said.
Drilling this down, Takashige pointed out that "both online and traditional companies regard technology companies as the most important partners for digital transformation. But traditional companies are far less interested in partnerships with start-ups, companies in different industries, governments, research institutions and consortiums, while online companies place importance on partnerships with these types of organizations. Yet, there are also some non-online companies that are successful in digital transformation. They are actively building partnerships with these organizations. When you want to succeed in digital transformation, it is the key how you develop an effective ecosystem."
Takashige then prompted the audience to look at undergoing fundamental changes in industrial structures. It is a shift from vertically integrated value chains to distributed ecosystems, and this shift is triggered by data, he said.
For example, vertically integrated financial institutions have traditionally offered banking services. But today, we see a large number of Fintech companies offering new services. Even more, new types of platform banks have emerged, providing basic banking services as cloud services. Also, digital platformers like Amazon and Alibaba have become alternative choices of providing customer interfaces for banking services. You can see here a distributed ecosystem of players connected through APIs. There is an emergence of a distributed API economy, Takashige noted.
He emphasized that what Chesbrough called "open service innovation" or an ecosystem-based innovation is essential for businesses today. "Fujitsu is committed to co-creation of human-centric value with our ecosystem partners, taking the open service innovation approach. We are implementing many co-creation projects, for example, an AI-enabled medical diagnosis support system," said Takashige. Fujitsu is running various programs to build ecosystems and accelerate open innovation with start-ups and research institutes. Fujitsu's Open Innovation Gateway in Silicon Valley, which Chesbrough mentioned, is one of the key vehicles for the purpose, he noted.
In closing, Takashige stressed the importance of 'trust' as a key for achieving successful co-creation through an ecosystem.
"It's important to build a solid foundation of trust if you want to carry out co-creation and open innovation successfully," he said. "Ultimately, innovation is created by connections of people even in Silicon Valley. A trustful relationship can accelerate the collaboration to find solutions to problems and deliver innovation."
In the latter half of this event, Takashige moderated a panel discussion featuring Chesbrough, Fursman and Lau.
The full text of their discussion on how we can transform our business through open innovation is available on the following website: