I’ve had the chance to read Henry Chesbrough’s new book, “Open Innovation: the New Imperative for Creating and Profiting from Technology.” It’s an insightful mix of practice and theory about how big technology companies are shifting their thinking about R&D — and the opportunities this creates for little companies.  Following are a synopsis, a brief author bio, and two lessons I found especially important for start-ups.  I hope you’ll buy a copy.

A Strategic Problem

“Open Innovation” starts by posing a question that many Valley veterans have idly pondered, but few have answered: how come the scientists at Xerox PARC invented so many groundbreaking technologies that Xerox never made money on?

For those who weren’t here yet, Xerox PARC was the source of many seminal technology inventions, including the graphical user interface, Ethernet, bit-mapped screens, font rendering, document management, web searching and online conferencing.  It was also the starting point for companies that really mattered: 3COM, VLSI, GRiD, Metaphor, Komag, SynOptics, Documentum, ParcPlace, PlaceWare, and more.  Yet Xerox hardly profited from this burst of innovation.  Rather than writing PARC off as a badly managed incubator, we can guess that something really important — and systematic — was happening.

With Xerox’s cooperation and several years of research / interviews, Chesbrough has identified the traditional R&D model that drove this result.  Xerox was coming out of an era when world-class research was limited to a few very large companies, each exploring their own narrow area of expertise.  Bell Labs, GE, DuPont, and IBM were the models for their day.  Each pioneered a “closed innovation” model where focused R&D was a way to dominate a technical niche.  In a world with few outside experts, corporate giants invented and integrated the new technologies they needed for captive product lines.

Old World, New World

Chesbrough has mapped the shift to an “open innovation” world, where technical expertise exists in many places and technologists race to get to market first.  In this world of Apache, mySQL and RFCs, big companies can’t warehouse their ideas and hope to unshelve them years later.  VC-backed start-ups will eat their lunch.

The rest of the book explores various R&D strategies in an “open innovation” world. In this new world, companies need to license in IP to keep pace with their competition.  Likewise, they need to license out strategic IP before alternative technologies make theirs worthless. Separate chapters are devoted to how IBM, Intel and Lucent are approaching this new reality.  (Hint: this book grows out of a decade of Chesbrough’s real-world consulting to large technology players.  It presents real strategic options as well as framework/theory.)

First-Hand Experience

In “The Innovator’s Dilemma,” Clayton Christensen identified the disk drive industry as one that academics study because it has undergone such rapid, dynamic, destructive change.  (The analogy is with fruit flies: geneticists study flies rather than humans because they can see whole generations live and die in a single day.) Christensen tallied only three firms that were able to survive a crossover to disruptive new disk technologies from 1965 to 1995, while 80 other died.  Not coincidentally, Chesbrough was the VP Marketing & Business Development at one of those three firms (Quantum’s Plus Development spin-out) that survived the periodic bloodletting to become the worldwide volume producer of its time.

Said another way, Hank Chesbrough is a Silicon Valley veteran.  Before dropping out to get a Ph.D. at Berkeley and teach at Harvard Business School, he spent ten years on the front lines of innovation and R&D.  Thus, he’s able to answer the fundamental objection of self-important MBA students: that their professor “doesn’t know how things work in the real world.”  Everything about this book is a careful marriage of practical observation and theoretical framework.

Why Do I Care?

While the book is framed from a big company’s point of view, it highlights the opportunities and risks for start-ups as well.  In the “open innovation” world, small companies have a real chance to create value.  Two things that struck me:

  • Technologies have no defined value outside a business model. R&D efforts to assign a priori value to inventions (without a customer use case) are bound to fail.  And, since most inventions fail to fit the business model of the funding organization, a true market exploration must be done to find out if each new technology is valuable.Start-ups are an ideal vehicle for this discovery process.  They are small, hungry, quick to learn and not limited to the parent company’s customers.  Chesbrough shows repeatedly how start-ups and spin-outs struggled to locate new and surprising markets for their technology.  Our early guesses for applying technologies are usually wrong, and forcing a small team to locate real customers is the only test of value.
  • Big companies want to avoid “false positives” while start-ups search for “false negatives.” LargeCorp managers never want to be associated with a flop, so set up elaborate gating processes to avoid “false positives” — those projects that fail after a sizeable investment.  Many start-ups are built around dreams of the “false negative” — a niche or technology that big companies have rejected too soon or failed to nurture.  Among the many bets on “false negatives,” a few tiny companies create huge successes and grow into LargeCorps.

SoundByte

Knowing how the big boys think — and what motivates them — helps us Lilliputians plan for the future.

[An update: since the first version of this article came out, Hank Chesbrough has moved to UC Berkeley’s Haas School of Business, where he is Executive Director of the Center for Technology Strategy and Management.]