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Sari Viskari, Pekka Salmi and Marko Torkkeli

IMPLEMENTATION OF OPEN INNOVATION PARADIGM


Cases: Cisco Systems, DuPont, IBM, Intel,
Lucent, P&G, Philips and Sun Microsystems

LAPPEENRANNAN LAPPEENRANTA
TEKNILLINEN YLIOPISTO UNIVERSITY OF TECHNOLOGY

Lappeenrannan teknillinen yliopisto TEKNISTALOUDELLINEN TIEDEKUNTA TUTKIMUSRAPORTTI 189


Digipaino 2007 TUOTANTOTALOUDEN OSASTO RESEARCH REPORT
ISBN 978-952-214- 478-2 (paperback)
ISBN 978-952-214- 479-9 (PDF) FACULTY OF TECHNOLOGY MANAGEMENT
DEPARTMENT OF INDUSTRIAL MANAGEMENT
ISSN 1459-3173
TUTKIMUSRAPORTTI –RESEARCH REPORT 189

Sari Viskari, Pekka Salmi and Marko Torkkeli

IMPLEMENTATION OF OPEN INNOVATION PARADIGM


Cases: Cisco Systems, DuPont, IBM, Intel, Lucent, P&G,
Philips and Sun Microsystems

Tuotantotalouden osasto
Department of Industrial Engineering and Management

Lappeenrannan teknillinen yliopisto


Lappeenranta University of Technology

FI-53851 Lappeenranta, Box 20, Finland

ISBN 978-952-214- 478-2 (paperback)


ISBN 978-952-214- 479-9 (pdf)
ISSN 1459-3173

Lappeenranta 2007
Abstract

The tightened competition, increasing R&D investments, the shortening life cycles of
products and technologies and the spread, mobility and specialization of knowledge with
other changes in the business landscape create new challenges to companies and especially
the innovation processes of them. “Open Innovation” launched by Henry Chesbrough
meets these challenges by suggesting more open business models to companies. They
should utilize more external sources and channels in searching new innovations and ideas
as well as in bringing own innovation in the markets.

The implementation of more open attitude has been and will be challenging for firms, since
open innovation is so broad term and consists of many sub-areas. However, there are
companies that have adopted more open attitude to their business models successfully. The
case corporations, Cisco Systems, DuPont, IBM, Intel, Lucent, Procter & Gamble, Philips
and Sun Microsystems, introduced in the report represent the different angles of the open
innovation, so the reader has a change to get the extensive view to the opportunities offered
by the new innovation paradigm. The purpose is to introduce the workings of the best
practitioners of the openness.

Besides the several opportunities of the open innovation, the report analyzes the R&D
investments and efficiency of selected companies by using R&D expenditures, issued
patents and the amount of intangible assets. Because of the small sample, statistical
conclusions are impossible to do, but the analysis gives a hypothesis that the companies
that use external sources in their innovation processes gain more patents and own
proportionally more intangible assets than companies that does not do exploratory search.
Patents and intangible assets are considered to be the important indicators of the future
success, since the value of a company is based more and more on intellectual property and
assets.

Keywords: Open innovation, open business model, R&D efficiency


Tiivistelmä

Koveneva kilpailu, suurentuvat T&K-investoinnit, tuotteiden ja teknologioiden lyhenevät


elinkaaret sekä tiedon leviäminen, liikkuvuus ja yksityiskohtaistuminen yhdessä muiden
liike-elämän muutosten kanssa asettavat uusia haasteita yrityksille ja erityisesti niiden
innovaatiotoiminnalle. Henry Chesbrough:n lanseeraama ”Avoin Innovaatio”vastaa näihin
haasteisiin ehdottamalla yrityksille avoimempaa toimintatapaa. Yrityksien pitäisi yhä
enemmän hyödyntää ulkopuolisia lähteitä ja kanavia niin innovaatioiden ja uusien ideoiden
etsimisessä kuin omien ideoiden markkinoille viennissäkin.

Avoimen innovaation toteutus on ja tulee olemaan haastavaa yrityksille, koska käsitteenä


se on laaja sisältäen monia osa-aluita. On kuitenkin yrityksiä, jotka ovat menestyksekkäästi
omaksuneet avoimemman toimintatavan liiketoimintamalleihinsa. Raportissa esitellyt
case-yritykset, Cisco Systems, DuPont, IBM, Intel, Lucent, Procter & Gamble, Philips and
Sun Microsystems, edustavat avoimen innovaatio osa-alueita monipuolisesti, joten lukijalla
on mahdollisuus tutustua avoimen innovaation tarjoamiin mahdollisuuksiin laajasti.
Tarkoitus on esitellä maailman parhaiden avoimen innovaatioiden soveltajien
toimintatapoja.

Avoimen innovaation mahdollisuuksien esittelyn lisäksi raportissa analysoidaan valittujen


yritysten T&K tehokkuutta käytettyjen T&K investointien, myönnettyjen patenttien ja
aineettomien oikeuksien kautta. Otoksen pienuudesta johtuen tilastollisia johtopäätöksiä ei
voida vetää, mutta analyysit osoittavat, että ulkopuolisia innovaatiolähteitä käyttävät
yritykset myös patentoivat enemmän ja omistavat suhteellisesti enemmän aineettomia
hyödykkeitä kuin suljetut yritykset. Patentit ja aineettomat hyödykkeet ovat tärkeitä
tulevaisuuden menestyksen mittareita, sillä yhä enenevässä määrin yrityksen arvo perustuu
juuri aineettomiin oikeuksiin ja hyödykkeisiin.

Avainsanat: Avoin innovaatio, avoin liiketoimintamalli, T&K tehokkuus


TABLE OF CONTENTS

1 INTRODUCTION ....................................................................................................1
1.1 Background of the study .....................................................................................1
1.2 Objects, restrictions and research questions.........................................................1
1.3 Structure of the research......................................................................................2
2 OPEN INNOVATION IN BUSINESS MODELS ...................................................4
2.1 Open innovation paradigm ..................................................................................4
2.2 The areas of the open innovation.........................................................................5
2.2.1 Exploring technologies outside the boundaries of the company ...................5
2.2.2 Using corporate venture capital and corporation venturing ........................ 10
2.2.3 Proactive management of IP and intangible assets ..................................... 12
2.2.4 Open source development ......................................................................... 14
2.3 Towards more open business model .................................................................. 16
3 CISCO SYSTEMS: MANAGING THE INTEGRATION OF EXTERNAL
TECHNOLOGY............................................................................................................. 18
4 DUPONT: INCREASING RETURN ON R&D INVESTMENTS BY
LICENSING IP .............................................................................................................. 20
5 IBM: AGGRESSIVE LICENSING AND OPEN SOURCE ................................. 23
6 INTEL: EXPLORATORY RESEARCH............................................................... 26
7 LUCENT: NEW VENTURES GROUP................................................................. 29
8 PROCTER&GAMBLE: CONNECT & DEVELOP............................................. 31
9 PHILIPS: ENTHUSIASM FOR OPEN INNOVATION CONCEPTS ................ 34
10 SUN MICROSYSTEMS: OPEN SOURCE FOR STAYING IN THE GAME .... 37
11 UTILIZATION OF OPEN INNOVATION: COMPARISON OF THE
COMPANIES ................................................................................................................. 39
11.1 Open source ...................................................................................................... 39
11.2 Licensing .......................................................................................................... 40
11.3 Venture Capital, Spin-offs and Start-ups ........................................................... 40
11.4 Collaboration, alliances and acquisitions ........................................................... 41
11.5 Summary .......................................................................................................... 43
12 OPEN INNOVATION AND R&D......................................................................... 44
13 CONCLUSIONS..................................................................................................... 50

REFERENCES
APPENDIX 1: Financial figures
LIST OF FIGURES

Figure 1. The structure of the report… … … … … … … … … … … … .… … … … … … ...3


Figure 2. The open innovation model… … … … … … ..… … .........................................4
Figure 3. External knowledge sourcing modes… … … … … … … … … … … … … … .... 9
Figure 4. Types of corporate venture capital… … … … … … … … … … … … … … … ...10
Figure 5. The business model as a cognitive map between technical and
economic domains… … … … … … … … … … … … … … … … … … … … … ...16
Figure 6. Cisco’s revenues, R&D investments and number of issued patents
during the period of 1996-2005… … … … … … … … … … … … … … … … ...20
Figure 7. DuPont’s new business model… … … … … … … … … … … … … … … … … ..22
Figure 8. DuPont’s revenues, R&D investments and number of issued patents
during the period of 1996-2005… … … … … … … … … … … … … .… … … .22
Figure 9. IBM’s innovation ecosystem… … … … … … … … … … … … … … … … … … 25
Figure 10. IBM’s revenues, R&D investments and number of issued patents
during the period of 1996-2005...… … … … … … … … … … … ..… … … … .26
Figure 11. Intel exploratory research… … … … … … … … … … … … … … … … … … ...27
Figure 12. Intel’s revenues, R&D investments and number of issued patents
during the period of 1996-2005… … … ...… … … … … … … … .… … … … .29
Figure 13. The model of New Venture Group in comparison with
internal business development (BD) and private venture capital models..30
Figure 14. Lucent’s revenues, R&D investments and number of issued patents
during the period of 1996-2005… ...… … … … … … … … … … … … .… … ..31
Figure 15. P&G’s global innovation network… … … … … … … … … … … … … … … ..32
Figure 16. P&G’s revenues, R&D investments and number of issued patents
during the period of 1996-2005… ...… … … … … … … … … … … … … ..… .34
Figure 17. The outdated, linear innovation model (1) and the new, more open
and simple innovation model (2)… … … … … ..… … … .. … … … … … … ..36
Figure 18. Philips’s revenues, R&D investments and number of issued patents
during the period of 1996-2005… … … … … … … … … … … … … … ..… … 36
Figure 19. Sun’s revenues, R&D investments and number of issued patents
during the period of 1996-2005… … … … … … … … … … … … … … … … ..38
Figure 20. R&D investments/revenue during the period of 1996-2005… … … .… … .45
Figure 21. Number of issued patents in US and worldwide
during the period of 1996-2005… … … … … … … … … … … … … … … … ..47
Figure 22. Intangible assets as percentage from total assets
during the period of 1996-2005… … … … … … … … … … .… … … … … … .48
Figure 23. The positions of studied companies in the open innovation paradigm......50

LIST OF TABLES

Table 1. Forms of collaboration… … … … … … … … … … … … … … … … … … … … … 6


Table 2. Choosing between acquisition and alliances… … … … … … … … … … ..........7
Table 3. Types of business models… … … … … … … … … … … … … … … … … … … ...17
Table 4. The use of open innovation… … … … … … … … … … … … … … … … … … … .43
1

1 INTRODUCTION

1.1 Background of the study

Open innovation paradigm launched by Henry Chesbrough (2003) is a new way to bring
innovations to market and create value from company’s intellectual property (IP). It is a
contrast to a traditional closed innovation model where company’s own research results are
used to create new innovations and products only for the company itself. Open innovation
suggests that research results and new inventions could be published outside the firm’s
boundaries and new ideas and innovations could emerge from some other place than firm’s
own research center.

The report studies the utilization of the new open innovation paradigm in eight worldwide
companies: IBM, Philips, DuPont, Intel, Sun Microsystems, Cisco Systems, Lucent and
Procter & Gamble. In literature, these companies are considered to be good examples of
implementing this new parading of innovation. The variety of utilization options of the
open innovation paradigm makes the approach difficult to adopt and adapt, but these
corporations have implemented it successfully and we can learn from them. These
corporations are also picked, because they all have little different approach to the open
innovation paradigm and they represent the different aspects of it; exploring new ideas
from outside the company, collaborating with partners, licensing intellectual property,
using venture capital and corporate venturing to create new start-ups, spinning-off
technologies and practicing open source policy.

1.2 Objects, restrictions and research questions

The literature of the open innovation offers many examples of how some companies have
implemented it to their business models (e.g. Chesbrough, 2003, 2006b; Sakkab,2003;
Dyer, 2004;Tennenhouse, 2004). The report aims to introduce these cases and compare the
companies to each other. The main objective is to create an understanding of the open
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innovation and benchmark the best practitioners of the new paradigm. Research question
of the study are following:

1. How open innovation could be implemented into the business model?


2. How the best practitioners of the new paradigm have opened their business models?
3. Does the open innovation show in the R&D activities and performance of the companies
that utilize the different aspects of the open innovation?

The nature of the report is descriptive and it has strong empirical aspect and the purpose of
it is to benchmark eight world-class companies in the utilization of the open innovation.
The study is restricted to analyze only these eight companies, although they are not the
only companies implementing the new paradigm. These companies have been selected,
because they represent the different aspects of the open innovation, but are not necessarily
the best succeeded ones.

1.3 Structure of the research

Figure 1 illustrates the structure of the report. The study starts with the literature review to
the open innovation paradigm and open business models. The literature from different
aspects of the open innovation paradigm is reviewed. After that each of the selected
company composes a case of the open innovation. The companies are introduced and their
open business models are discussed. In addition, every case contains a short analysis of the
revenues, R&D investments and the yearly issued patents during the period of 1996-2005.
After all individual cases, they are combined and the utilization of sub-areas of the new
paradigm in companies is discussed together.

Next part of the study gives the overview of the R&D activities of the companies. The
R&D investments, issued patents and intangible assets are analyzed and the purpose is to
observe, does the open innovation approach show in the R&D of a company.

In addition to scientific articles, publications and books, the data and references of the
research are collected from the Internet: companies’websites, PowerPoint presentations
available on the Internet and newspaper articles. The information about companies’R&D
3

is collected from the annual reports of the companies 1996-2005 and from the database of
Thomson ONE banker. To collect patent data, two databases are used offered by United
States patent and Trademark Office (USPTO) and Software for Intellectual Property (SIP).

1. INTRODUCTION

OUTPUT
INPUT

Research question 1

Literature review to 2. OPEN INNOVATION Various angles of the


sub-areas of the IN BUSINESS MODELS open innovation that
open innovation and Areas of the open innovation could be implemented
open business and types of business models into business models
models

Research question 2
Case studies how the
INPUT 3- The implementation of
selected companies have 3-11 BUSINESS CASES different aspects of the
implemented the Cisco, DuPont, IBM, Intel, INPUT
open innovation to the
alternatives of the open Lucent, P&G, Philips, Sun business models of the best
innovation practitioners

Research question 3
Data related to the R&D
activities of the case 12 OPEN INNOVATION Comparison of companies
companies, R&D AND R&D and different open strategies
investments, issued patents in the light of R&D
in US and worldwide and investments, patents and
proportion of intangible intangible assets
assets

13. CONCLUSIONS

Figure 1. The structure of the report


4

2 OPEN INNOVATION IN BUSINESS MODELS

2.1 Open innovation paradigm

The open innovation paradigm encourages companies to explore internal and external
sources of innovation opportunities, integrate those with the capabilities and resources of a
company and broadly exploit the new opportunities through multiple channels (West,
Gallagher, 2006). Figure 2 illustrates the basic principles of the open innovation. In this
literature review, challenges of the open approach, maximizing returns from internal
innovation, incorporating external innovations and the motivation of generate spillovers
and contribute knowledge without financial return, are discussed.

Research Development

OTHER
FIRM’S
Utilization of external MARKET
commercialization channels
NEW
INTERNAL MARKET
TECHNOLOGY
BASE CURRET
MARKET

EXTERNAL
TECHNOLOGY
Technology in-sourcing
BASE

Figure 2. The open innovation model (Chesbrough, 2006a, 4)

Although, the open innovation is stated to be the best way to function in today’s
challenging business world, it is not suitable for every company, and it does not exclude
internal R&D. Usually, the businesses of firms that are likely to benefit from the open
innovation are associated with globalization, technology intensity, technology fusion, new
5

business models and knowledge leveraging (Gassmann, 2006). Hence, the open
innovation has been connected with high tech industries, but Chesbrough and Crowther
(2006) have find evidence that the practices of the paradigm are also used in mature and
asset intensive industries especially inbound related concepts.

Sub-areas of the open innovation have been discussed separately in the literature before
Chesbrough launched the term “open innovation”, and after that, too. Various perspectives
include globalization of innovation (collaboration), outsourcing of R&D (utilization of
external knowledge), early supplier integration, user innovation and external
commercialization of technology (Grassmann, 2006). Next part of the study reviews
literature to the some aspect of the open innovation and it offers us a view about many
angles of the paradigm.

2.2 The areas of the open innovation

2.2.1 Exploring technologies outside the boundaries of the company

A company’s ability to develop, access, integrate and deploy knowledge is becoming more
crucial (Almeida et al., 2002). March (1991) argues that to succeed, firms need both,
exploitation and exploration. Exploitation refers to strengthen the existing knowledge and
the technology base of a company. Exploration, on the other hand, searches new
technological and business opportunities. In a new knowledge landscape, the R&D
personnel have a new role. Besides just knowledge generation by internal research and
development, knowledge brokering has become an essential part of an innovation process.
The success of this brokering depends on firm’s absorptive capacity, ability to understand
and apply external knowledge inside the company (Cohen & Levinthal, 1990). There are
several ways to filling the gaps of your business and knowledge base with external
technologies and ideas: in-licensing, capture knowledge from alliances and other
collaborative research projects, acquisitions and venture investments. (Chesbrough, 2003,
52; 182-184) Tidd et al. (2005) divide collaboration in different forms depending on their
significance and duration (Table 1).
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Table 1. Forms of collaboration (Tidd et al., 2005, 292)


Type of collaboration Typical duration Advantages Disadvantages
Subcontract/ Short term Cost and risk reduction Search costs, product performance
supplier relations Reduces lead time and quality
Licensing Fixed term Technology acquisition Contract cost and constraints
Consortia Medium term Experience, standards, Knowledge leakage
share funding Subsequent differentiation
Strategic alliance Flexible Low commitment Potential lock-in
Market access Knowledge leakage
Joint venture Long term Complementary know- Strategic drift
how Cultural mismatch
Dedicated management
Network Long term Dynamic learning Static inefficiencies
potential

The licensing process has been studied mostly from the licensors point of view, and there
is not much research about in-licensing. Even if In-licensing contains legal and business
risks, it is a way to acquire external knowledge that might not otherwise be available, and
complement existing downstream assets, such as marketing channels, manufacturing
capabilities, brand image and market power (Chesbrough, 2003; Lowe & Taylor, 1998). In
addition, in-licensing reduces development costs and offers a fast access to the technology
or/and the markets (Tidd et al., 2005, 296-299).

Tacit knowledge that is more complex, less codifiable and less teachable is more likely
transferred to a company with direct investments than licensing. Alliance literature
suggests that they are good alternatives to firms to build knowledge with inter-
organizational interaction and trust (Almeida, 2002, 150). Gulati (1998) defines strategic
alliances as voluntary agreements between firms involving exchange, sharing or co-
development of products, technologies or services.

Ahuja (2000) lists ways how a company could benefit from its network of partners,
collaboration and joint projects. First, knowledge sharing in collaborative projects enables
firms to obtain greater amount of knowledge with lesser cost. Second, the partners of the
network have different skills and competences that they bring to the shared projects and an
individual firm could benefit from economies of specialization without extra costs. Third,
the economies of scale could be also attained, since large research projects generate more
knowledge than smaller ones. In addition, the inter-firm linkages are channel for
communication not only with partners but with their partners, too (indirect contacts).
7

Usually substitute strategy to the strategic alliances is the acquisition strategy. But the
mergers and acquisitions do not always guarantee efficient knowledge transfer
(Vanhaverbeke et al., 2002). Most of the acquisitions fail, but so do most of the alliances as
well. The reason for this is that companies do not know which strategy to implement in
different situation. Table 2 lists the factors that affect on the decision whether to acquire of
allay and give suggestion, which strategy to implement in each situation. (Dyer et al.,
2004)
Table 2. Choosing between acquisition and alliances (Dyer et al., 2004)
FACTOR STRATEGY
1. Types of synergies
Modular Non-equity alliance
Sequential Equity alliance
Reciprocal Acquisition
2. Nature of resources
Relative value of soft to hard resources
Low Non-equity alliance
Medium/Low Acquisition
High Equity alliance
3. Extent of Redundant Resources
Low Non-equity alliance
Medium Equity alliance
High Acquisition
4. Degree of Market Uncertainty
Low Acquisition
Low/Medium Equity alliance
High Non-equity alliance
5. Level of Competition
Degree of competition for resources
Low Non-equity alliance
Medium Equity alliance
High Acquisition

Non-equity alliances are usually best suited to generate modular synergies, where
resources are managed independently and only greater results are pooled. In the case of
sequential synergies, where every company does it own task in a process, companies have
to customize resources and monitor each others’actions carefully. That is why the equity
8

alliances are considered as the best alternative. For companies that desire reciprocal
synergies, the acquisition strategy is the most suitable. If new resources needed to create
are hard, the acquisition strategy could be the best, because hard assets are easy to value.
On the other hand, equity-alliances are more suitable for situations were the critical
resources are related to employees, because acquisitions may decrease the productivity and
motivation of the employees of the acquired company. Redundant resources should also be
considered. If the potential collaboration will contain a lot of redundancy, the acquisition
strategy is better, since it allows the executives to cut redundant resources. (Dyer et al.,
2004)

Besides just internal factors (resources and synergies), companies should take into account
external factors, markets and competition, as well. If competition for accessing certain
resources/firms is tight, the acquisition may be the only alternative to win the battle, but if
the business uncertainty is high, the company should avoid taking over other firms.
Alliances are less risky in highly or moderately uncertain markets. (Dyer et al., 2004)
Chesbrough and Swarzt (2007) argue that the mode of collaborative development depends
on the objectives of the collaboration and the R&D capabilities of the partners.

Van de Vrane et al. (2006) have also built a framework to choose the right governance
mode for external technology sourcing (Figure 3). They combine the transaction cost
theory and the real option reasoning and argue that commitment to investment increases
with decreasing uncertainty. The technology distance, technological newness and prior
cooperation are the factors that have effects on the governance mode. Venture capital is
discussed more detailed in the following chapter 2.2.2.
9

High Reversibility Low

Low Commitment High

Non-equity Equity
Corporate VC alliances alliances Acquisition

High Technological newness Low

High Technology distance Low

Low Prior cooperation High

Figure 3. External knowledge sourcing modes (adapted from van de Vrande et al., 2006)

One possible source of innovation is the customers of a company. In the field of consumer
goods, open innovation literature refers to community sourcing, where the customers
produce ideas and develop new solution with toolkits and design tools offered by a
company. This kind of development is used specially in computer game industry (von
Hippel & Katz, 2002 ;Prugl & Schreier, 2006) Users innovations have been written already
for a long time. Lead users could be useful to manufacturer in the early phases of
innovation process, but on the other hand the knowledge transfer from customer to
manufacturer is often costly and difficult (Cooper et al., 2002; Piller & Walcher, 2006).
Piller & Walcher (2006) offer toolkits for idea competitions (TICs) as solutions, which
enable the knowledge transfer and the motivation of customers to participate the new
product development.

The new sources of innovation do not occur only from collaboration with other firms,
suppliers and customers. In addition, universities, other higher education institutions,
government research organizations and other links in public sectors are sources of external
knowledge (Laursen & Salter, 2006). Siegel et al. (2003) argue that commercial
technology/knowledge transfer from universities to practitioners through licensing, joint
ventures and start-ups has increased after changes in university patent legislation in 1980s.
However, the technology transfer from universities to firm is still very inefficient.
Companies should be more proactive in their efforts to bridge the gap between academia
10

and business, they should hire managers with university experience and explore alternative
ways to practice university-industry technology transfer and tapping into social networks.
(Siegel et al., 2003)

2.2.2 Using corporate venture capital and corporation venturing

Chesbrough (2002, 5) separates the terms “corporate venture capital” and “corporate
venturing” by defining corporate venture capital as investments that a company does to
fund directly external start-ups or start-ups that it has spun off. Corporate venturing, on the
other hand, is a general term to all venture activities in the company and includes also
spinning off internal ventures. There are four types of corporate venture capital
investments, depending on the objectives of the investing corporation and the linkage
between the parent and the venture (Figure 4).

Corporate investment
objective

Strategic Financial

Driving Emergent
Tight Advances strategy of current Allows exploration of potential
business new business
Link to
operational
capability
Enabling Passive
Loose Complements strategy of Provides financial returns only
current business

Figure 4. Types of corporate venture capital (Chesbrough, 2002, 7)

Some of the VC investments of corporations are strategic. A company tries to increase the
revenue and profits of its current businesses by seeking synergies with the new venture and
the company’s own businesses. If the linkage between them is tight, it is driving type of
investment, and the VC investment is done for boosting the current businesses of the
parent company. Driving investments are used for instance promoting a standard. Enabling
investments are also strategic, but operational linkages between the parent and the venture
are not required to be so tight. In these cases, start-ups are usually developing
complementary products or services that increase the demand of the products and services
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of the parent company. On the other hand, the objective of VC investment can also be
financial, when a company is mainly looking for only returns from the investment. With
emergent investments a company creates tight link to a venture that does not advance the
current businesses of the parent, but may become valuable in the future. These kinds of
investments are done for example to start ups that have been spun off earlier from the
parent company. VC investment to ventures that are not linked to the parent’s strategy or
operations, are done basically just for returns. (Chesbrough, 2002, 6-10)

Corporate venturing mutually advances the both parties, the parent company and the
venture. While venture firms have access to the parent’s core competences and resources,
corporate venturing offers to the parent company an opportunity to experiment new areas
of business and reconfigure resources (Dougherty, 1995). Corporate venturing could be
seen as a source of organic growth and the vital element of renewal, but also high-risky
and too bold initiative that distracts the core business. The concerns are justified, since
usually corporate venturing does not create the result the company is hoping for. McGrant
et al. (2006) have studied Nokia’s venturing activities (Nokia Ventures Organization), and
list eight advices, how to extract value from corporate venturing and control the risk
related to it:

• Protect the ventures from short-term pressure: New ventures could be very benefit
to the parent company in a long run. Ventures have to be structured the way that
they are not expected to deliver immediate financial results.
• Recruit the employees to the new venture carefully: When the parent is choosing
personnel to the new venture. Only enthusiasm towards the venture is not enough
and volunteers are not necessarily the best alternatives. Instead the parent should
look for people with good networking skills that have been participated in
innovative projects earlier and who are good at building entire businesses not just
technologies. Own training programs for the new leaders of the venture could be
also organized.
• Measure ventures differently than your core businesses: New corporate ventures
can not deliver the same results than core businesses and it requires different
management system.
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• Manage the whole portfolio of ventures, not just an individual venture: Maximizing
benefits from venturing the investing company has to observe the portfolio of
ventures and the roles of ventures in that content, not just evaluate the success of
the individual project.
• Prepare to learn from new markets: The new market of the venture is different
from the parent’s core ones. Learning could require time and several changes in
directions. Rushing into market and ignoring its principles cause just extra costs.
• Manage new ventures in stages: In the management of ventures, their
unpredictability should be taken account. The stage system reduces the ambiguous
of the management and gives opportunities to redirect ventures in certain points.
• Stop ventures early and cheaply: Traditional dilemma in corporate venturing is
called escalation commitment, where the venture becomes too personal to
employees and it is not stopped even if there would be good reasons for that. Early
discontinuation decisions allow companies to limit potential downsides of the
venture and personal capital the managers could invest.
• Build in learning-transfer mechanism: When a venture division is designed,
corporate-wide learning should be considered. Mechanism for transfer knowledge
could be, for example, transferring the whole venture into the parent company,
creating collaborative culture: organizing training, networking events and work
rotation, documentations, bringing explicitly the examples of the ventures into
training-and-development programs.

2.2.3 Proactive management of IP and intangible assets

Knowledge economy, that emphasizes knowledge as the most essential element of gaining
profits, requires firms to change their management of IP and other intellectual capital
(Granstrand, 1999). IP should be managed as a strategic asset of a company and the
management should take the technology lifecycle into account (Chesbrough, 2006b)

Many technologies and patents developed within a company are never commercialized.
Chesbrough (2006b, 26) lists many reasons why to offer unused IP outside the company:
unused technologies/IP are a waste of resources, unused technologies decrease the
motivation of employees that created them, unused ideas increase the disorder of
13

innovation process and databases, new knowledge could be generated and captured by
releasing unused technologies and unused technologies may end up in the markets anyway
via some other company and innovation.

The increased patent numbers and the importance of intellectual assets have encouraged
the birth of the secondary markets of IP, technologies and know-how. Markets for
technologies are spaces where intellectual assets are traded (Arora, 1997; Arora & Fosfuri,
2003). Chesbrough (2006b, 139) names the companies, that act as intermediary in
secondary markets, as innovation intermediaries. Companies like InnoCentive, NineSigma,
InnovationXchange and Yet2.com help companies to find markets to companies’
technologies and find potential external ideas to be used in companies’own businesses.

Licensing is increasing, especially in high-tech industries (e.g. Grindley & Teece, 1997;
Rivette & Kline, 2000; Arora & Fosfuri; 2003) and it has changed from a tactical issue to a
one of the central strategic concerns. There are several (strategic and economic) reasons,
why companies license their technologies and patents. Licensing could be a low-cost
method to profit from technologies, which the company does not utilize in its core
businesses. Gallini (1985) has stated that the incumbent companies could try to prevent the
development of new and better technologies by licensing their old technologies to rivals.
Licensing is also an alternative to expand the use of the company’s own technology into
unfamiliar industries. In addition, one traditional explanation to licensing is that companies
license to make their technologies as a standard of the industry. (Arora et al., 2001) A big
patent portfolio also enables cross-licensing that gives companies freedom to manufacture
and design new products and capture value from their innovations (Grindley & Teece,
1997) As a summary, Tidd et al. (2005, 261) have listed the benefits of licensing
intellectual property rights:
• Reduced or eliminated production and distribution costs and risks
• Reaching a large market
• Exploitation in other applications
• Establishing standards
• Gain access to complementary technologies
• Block competing developments
• Convert competitor into defender
14

If IP is not used internally, there are also other ways to extract value from unused
intellectual assets than licensing or gross-licensing. Promising IP could be applied into a
new start-up, spin-off or collaborative company such as joint venture. If licensing is not
possible, a patent or a technology could be sold or even donated for free (see next chapter
about open source development). In addition, proactive management of IP could reduce
cost, motivate innovators/R&D employees and promote the public image of the company
as an innovative company. (Tao et al., 2005)

The development of a large patent portfolio with large proportion of high-quality patents
from large area of business is important part of the new IP strategy. However, despite of
growing importance of licensing, IP strategy is still primary for supporting a company’s
core businesses. To be just a “licensing company”and far from the product market is very
risky strategy. (Grindley & Teece, 1997)

2.2.4 Open source development

Open source software contains two basic principle of the open innovation: sharing and
collaboration. The development of a technology is collaboration and rights to use the
resulting technology are shared to everyone. (West & Gallagher, 2006) Since technologies
developed under open source software are free available to anyone and a company can not
prevent other companies to use the same technology, profiting from open source is
challenging and business models have to be built around the technology.

Open source development refers the development, where the source code of a computer
program is free available and shared via the Internet. It enables every Internet user (with
sufficient skills) to participate the development process of the program. The emergence of
open source goes back to 60s, when researcher had to share their software code, because
commercial software was not available at the time. The interesting towards open source
has increased due to its rapid diffusion, significant capital investments by large corporation
and new, more collaborative organization structure. (Lerner & Tirole, 2002) The well-
known examples of open source development are for instance GNU/Linux operating
system, Perl programming language and Apache server software. Today, many software
15

companies support the open source ideology by opening some of their development
project, for example Sun Microsystems’Solaris and Netscape’s Mozilla (Hertel et al.,
2003).

Even though commercial companies are not able to generate direct revenue from open
source software, many of them have published open source initiatives. According to Lerner
& Tirole (2002, 223-227) companies have basically two open source strategies to
implement. First one is straightforward and reactive strategy. Companies offer commercial
complementary services and products that support open source software. The second
strategy is more proactive. Companies release proprietary code under an open source
license. By doing this, companies try to generate more profits on a complementary
segment. The companies that are lagging behind a leader or are too small to compete in
primary segments with leaders often use open source to boost their business.

West & Gallagher (2006) identify four approaches to open source. Two of them are based
on structural relationships and the other two are product related:
• Pooled R&D/product development: Participants jointly contribute to the
development project.
• Spinouts: Non-commercial technologies are spun out from a parent company for
free to support other goals of the company
• Selling complements: The value from open source projects are gained by offering
complement products and services
• Donating complements: The open source applications and complements are
provided for boosting the core product/technology

On the other side, the motivation of individuals to contribute to open source projects comes
from direct utility, intrinsic benefits and signaling. The participation to open source
development could offer a direct tool for the individual developer of his/her company. The
development work could also include intrinsic benefits like learning new skills and
personal fulfillment. Open source project are also an avenue to show personal capabilities
and gain respect. (West & Gallagher, 2006)
16

2.3 Towards more open business model

Due to the emergent of e-commerce and e-business, a term “Business model”is often used
by scholars and managers these days, but the exact definition of it is hard to find.
Basically, business model tells, how company makes money. Chesbrough & Rosenbloom
(2002) define business model cognitively as an intermediate between technical and
economic domains (Figure 5).

BUSINESS MODEL
Technical inputs: • Market Economic outputs:
• Feasibility • Value proposition • Value
• Performance • Value chain • Proce
• .... • Costs and profits • Profit
• Value network • ...
• Compatitive strategy

Figure 5. The business model as a cognitive map between technical and economic domains
( Chebrough & Rosenblood, 2002)

Every company has a business model, the way the value is created and captured. The
business model consist of six functions: articulation of value proposition, identifying
market segment, defining of the structure of the firm’s value chain, specifying the revenue
generation mechanisms and estimation of cost structure and target margin, the description
of the position within the value network, and formulation of competitive strategy.
(Chesbrough, 2003, 64-65)

The adoption of the open innovation does not happen without changing the current
business model. Chesbrough (2006b, 110-134) divides business models into six types
depending, how advanced they are in combining innovation processes and IP management
with their business models. The types of business models are summarized in table 3.
17

Table 3. Types of business models (adapted from Chesbrough, 2006b, 111)


Type 1 Type 2 Type 3 Type 4 Type 5 Type 6
Changeable,
Undifferenti Externally
Description differentiated Segmented Integrated Shapes
ated aware
markets
Identifies
Connected
Innovation Externally new
none Ad Hoc Planned to business
process supportive business
model
models
IP Financial Strategic
NA Reactive Defensive Enabling asset
management asset asset
Kebab & Start-up Technology Mature Leading
Dell, Wal-
Examples pizza technology push industrial financial
Mart
restaurants companies companies R&D firms firms

Type 1 companies compete basically with price and availability. They have no
development activities or significant intellectual property. In the second level, companies
have little IP and some innovation activities and differentiation, but those activities are not
managed explicitly. The companies with type 3 business models have more chances to
sustainable development. These business models include an explicit innovation process
and IP management. The firm segments its markets and invests in R&D. These firms
utilize the closed innovation model. Types 4, 5 and 6 are considered as open ones. Type 4
business models start to open up to the environment. Customers and suppliers have a role
in innovation process, innovation from outside are scanned and IP is managed as a
corporate asset with occasional out-licensing cases. When companies utilize the type 5
business models, they could be called as real open innovation companies. Internal and
external R&D activities are then integrated and widely understood and companies also
focus on new markets and business with current markets and businesses. The innovation
process is connected to the business model and IP is managed as a financial asset. The last
type of business model (6) is even more open than types 4 and 5. The essential feature in
this type is that with it, companies are able to change themselves – innovate their own
business models. IP is now managed as a strategic asset and customers’and suppliers’
business models are integrated with the company’s own. (Chesbrough, 2006b, 111-134)

Next chapters of the study introduce eight companies that have been examples of the open
innovation in previous literature. The report will present the open business models of these
best practitioners and after that summarize the exploitation of open innovation in practice
in these companies. The companies are introduced in alphabetical order starting from
Cisco Systems and ending to Sun Microelectronics.
18

3 CISCO SYSTEMS: MANAGING THE INTEGRATION OF


EXTERNAL TECHNOLOGY

Since its foundation in 1984, Cisco Systems Inc, core competence has been internet
protocol (IP) - based networking technologies and the company has grown from the small
group of computer scientist at Stanford University to the worldwide corporation with over
47 000 employees and net sales almost $ 25 billion. Cisco Systems offers IP-based
networking and other products relating to the communications and information technology
industry worldwide. It provides products for transporting data, voice, and video around the
world. The core areas of the company are routers and switching systems, but it also offers
application networking services products, optical networking product, network security
products and services, storage area networking products, wireless networking products,
home networking products and video systems. It is the market leader in multiple areas,
such as routing and switching, unified communications, wireless and security (Cisco,
2006a) The company offers its products and services through its direct sales force, systems
integrators, service providers, other resellers, distributors, and retail partners. It has
strategic alliances with Accenture, Ltd.; AT&T Corp.; BearingPoint, Inc.; Cap Gemini
S.A.; Electronic Data Systems Corporation; EMC Corporation; Ericsson; Fujitsu Limited;
Hewlett-Packard Company; Intel Corporation; International Business Machines
Corporation; Italtel SpA; Microsoft Corporation; Motorola, Inc.; Siemens AG; and Sprint
Nextel Corporation. (Yahoo! Finance) The company invested more than $ 3.3 billion in
their R&D activities. (Cisco, 2006a) Major R&D facilities are located in USA, India,
China and Israel, but the company have R&D facilities also in Europe (Cisco, 2006b).

Cisco systems’innovation strategy is a combination of internal development, strategic


alliances and acquisitions (Cisco, 2006b, 20). Cisco is an active acquirer and investor in
innovative companies and since 1993 it has acquired 108 firms (Cisco, 2006a). The target
is to get 30 % of the revenue from acquisition and development (A&D) activities. The
other important part of their strategy is partnerships. Acquisitions and partnership strategy
was fairly unique in the high-tech industry at the 1980s and 1990s, but this strategic choice
enabled the access to new technologies and the faster development times of new solutions.
(Harvard Business School, 2000, 3, 6)
19

In the case of Cisco, the acquisitions are done to access the scarce intellectual assets and
basically they acquire people. Almost all manufacturing is outsourced. Typically,
acquisitions like that are difficult to implement and for ensuring the success of an
acquisition, Cisco set three goals that every acquisition must meet and those were
employee retention, follow-up on new product development and return on invest. (Harvard
Business School, 2000, 4-6) To make the right decisions, whether acquire or allay, Cisco
have centralized the corporate development function that includes M&As, alliances and
technology incubator under the same person (Dyer et al., 2004).

The proposals for potential companies that Cisco could acquire come from its own
business units. Cisco has specific screening criteria for potential acquisition candidates and
approximately 25 per cent of acquisitions are first small equity investments (Dyer et al.,
2004). An acquisition has to offer both short and long term win-win situation for Cisco
and the acquired company, the company has to share common vision and chemistry with
Cisco and it has to be located near Cisco’s facilities. Cisco has acquired different types of
companies with product in different lifecycle: software companies, pre-production
hardware companies, small hardware companies shipping products and mature hardware
companies. Cisco uses scenario planning approach to decide whether acquire or nor and
how fast to do it and it has developed its own integration process for melting acquired
companies to a part of Cisco systems. (Harvard Business School, 2000, 6-7, 19)

Further, the beginning of the Cisco is an example of the open innovation, too. Cisco was
founded with the help of venture capital and it received its initial funding from the venture
capital firm Sequoia Capital. (Harvard Business School, 2000, 2) Since not long ago Cisco
was start-up itself, it has embedded in startup ecosystem and the human linkages in that
ecosystem have helped to implement the acquisition strategy. (The most acquired
companies are start-ups). The entrepreneurial history of executives and managers is also
very important element in the success. (Mayer & Kenney, 2004)

Cisco’s growth has been strong (Figure 6.). In 2005, its revenue is six times bigger than it
was in 1996 and earlier in the past the growth was even faster. It grew over 30 % in
revenues and profits from 1987 to 2000 (Mayer & Kenney, 2004). The positive
development shows also in R&D investments. Cisco’s A&D strategy has been the one
20

reason for the fast growth and it has also enabled the growing of the number of issued
patent.

30,000 1,400

25,000 1,200

1,000
20,000

Patents
800
M$

15,000
600
10,000
400
5,000 200

0 0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Revenue R&D expenses Patents (publications)

Figure 6. Cisco’s revenues, R&D investments and number of issued patents during the
period of 1996-2005

4 DUPONT: INCREASING RETURN ON R&D INVESTMENTS BY


LICENSING IP

DuPont, formed in 1802, operates in many industry braches. It offers innovative products
and services for agriculture, nutrition, electronics, communications, safety and protection,
home and construction, transportation and apparel. There are 60 000 employees working in
about 70 countries. In 2005, total assets of the company were $33.3 billion and sales $26.6
billion. DuPont highlights sustainable growth in business as well as environmentally
issues. DuPont is a science-based company and one of the most innovative companies in
the world. (Dupont, 2006a). DuPont’s businesses are divided in 5 categories: Electronic
and communication technologies, performance materials, coating and colour technologies,
safety and protection and agriculture and nutrition. In 2005, DuPont’s R&D expenditure
was 1.33 billion and the company employs 1500 scientist and researchers. (DuPont, 2006b)

Even if IBM is the most famous company that licenses its own intellectual property to
outsiders, DuPont is an active licensor, too. DuPont has had licensing activities since
21

1970s. First the company licensed only processing technologies, but during the resent
years, it has started to look opportunities to license the other technologies as well and in
2001, it received over $300 million revenue from licensing. (Wood, 2002) DuPont
markets its intellectual assets on its websites (DuPont Technology Bank) and it uses the
help of consultants and online firms, like yet2.com, too. (Wood, 2002). Besides licensing
its intellectual property, DuPont has been donating its patents to universities, hospitals and
non-profit groups since mid-90s. The main reason for doing that has been the tax break and
public relation boost. (Sherwood et al, 2005)

“DuPont technology bank”is a website, where DuPont offers know-how, patent licenses,
process improvements, software and operating techniques. Users can search technologies
and contact the technology bank, if they are interested in DuPont’s technology. The site is
provided by Yet2.com and it also answers the information requests and questions made
thorough the website.

Bob Hirch, Global managing director in DuPont (2002) list reasons for licensing. First of
all, licensing grows revenues. By licensing its IP, DuPont extracts additional business
value from its R&D investments and gains revenue from technologies that do not fit in the
company’s strategy. Some technologies could be created specifically for licensing.
Licensing requires minimal capital outlay and opens a new market for DuPont
technologies. The growth of new large economies like China and India creates ready
markets for those technologies.

DuPont is a material supplier and therefore its place in the supply chain is near the
beginning. While the physical volumes are dropping and knowledge content is increasing,
DuPont, as well as other material suppliers, will need a new business model. The new
model that DuPont has introduced includes elements of the open innovation (Figure 7). It
contains investments in the research and development of new materials, new partners and
value capture for knowledge content (for example licensing). Essential in the new business
model is also co-operation with all players, technology providers, for instance universities,
start-ups and government laboratories, investors and establishing companies. (Rekowski,
2006)
22

Knowledge (IP) Proprietary materials

Technology
Providers DUPONT PARTNER
Material supplier INTEGRATO

Royalty payments Materials revenue

Figure 7. DuPont’s new business model (Rekowski, 2006)

DuPont’s revenue and R&D investments have not changed much during the past ten years
(Figure 8). As a material supplier, DuPont has been concentrating on creating new value
from knowledge that it produces by licensing its technologies, not much on looking
innovations from outside. It has a strong patent portfolio and it gains over 2000 patents
every year, which enables the licensing strategy.

45,000 3,000
40,000
2,500
35,000
30,000 2,000
25,000 Patents
M$

1,500
20,000
15,000 1,000
10,000
500
5,000
0 0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Revenue R&D expenses Patents (publications)

Figure 8. DuPont’s revenues, R&D investments and number of issued patents during the
period of 1996-2005
23

5 IBM: AGGRESSIVE LICENSING AND OPEN SOURCE

International Business Machine Corporation is the world’s largest IT-company and has
been in the industry since it began. (IBM 2006a) It has about 329 000 employees in 75
countries. In 2005, IBM’s revenue was $91 billion and total assets were $105.7 billion.
(IBM, 2006a)

In the annual report 2005 (IBM, 2006b, 14, 17), IBM announces that it has two ultimate
goals: to create long-term value to the shareholders and help the customers to become more
efficient trough IT solutions. IBM operates in three segments: Systems and financing (28
% from pre-tax income), software (37 %) and services (35 %) (IBM, 2006c, 5). IBM’s
business model and strategy are based on innovation. IBM tries to maintain its business
leader position by focusing high-value and innovation-based solutions and services. As the
implementation of this strategy IBM sold its Personal Computing Business to Levano
Group Limited, the largest manufacturer of personal computers in China in 2005 and at the
same year acquired 16 software and service companies (IBM, 2006b, 22, 63). IBM is
moving strongly from hardware to software, towards more sophisticated products and
services.

To support this innovation strategy IBM has a world largest IT research organization. More
than 3000 scientists and engineers work in eight laboratories in USA, Japan, China, Israel,
Switzerland and India (IBM Research, 2006, 12). IBM invests $5-$6 billion in research
and development every year. In 2005, the expenditure to R&D was $5.8 billion. With this
massive input in R&D, they have received more patents than any other company in the
world. Over the past four year, IBM have received about 13 000 patents which is 5 400
more than second highest result and 8000 more than second in IT sector. (IBM Research,
2006, 24)

Today, IBM is a successful company, but not more than decade a go, it struggled in deep
troubles. Its market share in PC business was decreasing and it had to lay off a huge
amount of employees. The new business model created at that time concentrated on
generate new revenues from semiconductor business, IP licensing and open source
software initiatives.(Chesbrough, 2006b, 190)
24

IBM is probably the best company to receive revenue from its IP licensing. In 2001, it
received $1.9 billion royalty payments for its licensing actions (IBM, 2006b). The value of
licensing is even bigger considered also cross-licensing that company practises, because it
does not show in income statement. One reason for this good result is that IBM is a patent
leader. It has more patents than any other company in the World. So it is able to license its
technologies widely. Besides patents, IBM licenses its know-how, trade secrets and other
forms of technology. (IBM, 2006b, 20)

IBM’s huge patent portfolio is not an incident. Company supports patenting culture. Strong
patenting protects IBM’s leadership technologies, gives the company freedom to action
and drives innovativeness. IBM practices strong IP licensing strategy on purpose. It
includes aggressive patent licensing with increased royalties, manufacturing joint ventures,
strategic joint development alliances and leverage and return on technology. (Ehrlickman,
2006)

To implement its licensing strategy, IBM has started “Ventures in Collaboration” –


licensing program. IBM offers 40 000 patents for licensing and promise to help
entrepreneurs to adopt the technology behind the patent. Start-ups with less than $10
million in sales will pay $25,000 for a standard cross-licensing agreement. Later-stage
venture-backed companies with more than $10 million in sales will pay 1% of royalties in
five-year contracts. (York, 2006)

This is a new approach to venture investing and differs from the traditional where big
companies just give cash to start-ups. The biggest reason for IBM to do this is that by
opening up its IP vault, IBM is hoping that its hardware and software brands will be used
in the new commercial products developed by its partner. In the IT and computing
industry, it is extremely important to get as many users of own technology as possible.
(York, 2006) According to vice president Ehrlickman (2006) other advantages from
licensing to IBM are: access other companies technologies through cross-licensing,
increased research motivation (“Patent portfolio race”), the minimization of patent
litigation and, off course, generation of revenues from royalties.

Other example of IBM’s more open strategy is its open source policy. In 2005, IBM
pledged 500 of its existing software patents to the open source community, which means
that they are now free available. What IBM gains by giving its IP away? Open source
25

software provides a common platform on top of which IBM can build and sell special
applications and services and by using open source customers are also less expensive for
IBM. (Economist, 2006) A little like open source is also IBM’s Power.org society, where
companies that has signed in and paid membership fees have access to IBM’s PowerPC
microprocessor architecture. A reason for this open standard community is to increase
collaboration and standardization of IBM’s architecture. (Lamarca, 2006, 3) IBM invests
about $1 billion in open source software initiatives in every year and it supports strongly
the development of Linux.

IBM is a model example of openness in the other fields of open innovation as well. Figure
9 illustrates the ecosystem of innovation that IBM has systematically built for the sourcing
of external innovation. As we can see IBM is using pretty much every possible source to
find a new business opportunity.

First-of-a-kind Industry
IBM University Solution Labs OnDemand
Partnership ExtremeBlue Innovation
IBM Research
GSMB (small businesses)

Universities Goverment Labs

IBM Customer
Solution
VC companies Cross Licensing

Offshore Innovations
Developer relations

Venture Capital Industry Consortia Global Resourcing


Relations Group Team

Developer relations group,


DeveloperWorks, AlphaWorks

Figure 9. IBM’s innovation ecosystem (IBM, 2004)

Such as the case of DuPont above, IBM’s revenues and R&D investments has also been
steady during the period of 1996-2005, but its issued patent per year – ratio has grown
(Figure 10). While it received about 5000 patents in 1996 the amount of issued patents was
almost 10 000 in 2005. In US, IBM is the patent leader and with a large patent portfolio, it
can implement an active licensing and open source strategy. Its collaborative and open
26

attitude in R&D activities with the external sources of innovation has helped to gain its
position.

120,000 12,000

100,000 10,000

80,000 8,000

Patents
M$

60,000 6,000

40,000 4,000

20,000 2,000

0 0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Revenue R&D expenses Patents (publications)

Figure 10. IBM’s revenues, R&D investments and number of issued patents during the
period of 1996-2005

6 INTEL: EXPLORATORY RESEARCH

Intel, funded in 1968, is the world’s largest semiconductor company with the revenue of
$38.8 billion and the total assets of $48.3 billion in 2005. It is also big manufacturer of
computer, communication and networking products. Intel employs 99 900 employees and
it has 199 offices and facilities around the world. Intel product portfolio consists of
microprocessors, chipsets, motherboards, flash memory, wired and wireless connectivity
products and communications infrastructure components, application processors, cellular
baseband processors and networked storage product. (Intel, 2006)

The company has approximately 7000 researchers. Most of the R&D facilities are located
in the USA, but there are development activities also in Israel, China, India, Russia and
Malaysia. (Intel, 2006)

Intel’s approach to the open innovation is to utilize external channels to its innovation
process. Intel’s R&D strategy is based on four key components and those are university
27

research grants, open and collaborative research laboratories located near universities,
proprietary internal research programs and corporate venturing. This concurrent research
strategy aims to meet strategic objectives: investigate in technologies that might lead to
new businesses and identify disruptive innovations that threaten technology development
and could become next competitive advantage. (Tennenhouse, 2004)

Figure 11 illustrate the idea of Intel’s exploratory research. The process starts with
scanning the environment and new promising research areas. Those research projects that
are interesting are boosted with grants, lablets, internal research or Intel Capital until
output is clear enough to make the strategic decision whether commercialize the
product/technology or not.

Sampling Research amplification Tech development

Grants

Lablet projects

Internal research projects

Intel Capital

Detection discontinuity Strategic decision

Figure 11. Intel exploratory research (Tennenhouse, 2004, 20)

Intel has given grants to more than 500 universities and it positions its open collaborative
laboratories near universities that are leaders in the area Intel is interested in. A one lab
employs about 20 researchers from Intel and 20 from university. Although laboratories are
owned by Intel, research environment in the labs is open and all projects are at least partly
public and patents are expected to be rare. Intel keeps it more important to learn fast from
the wide research ecosystem and get huge amount of ideas that receive IP rights. Of
course it has also its own internal research activities that could improve promising
inventions captured. Intel encourages laboratories to bring promising ideas deeper inside
28

Intel and its business units. The future is protected with the new strategic plan of Intel’s
exploratory in every two years. In addition, almost half of the researchers in laboratories
are students. (Tennenhouse, 2004)

Intel is one of the largest venture capital companies in the world and has invested more
than 4 billion dollars in about 1000 companies (Intel Capital, 2006). Intel started to invest
its equity already in the early 1980s in its suppliers. In the middle of 90s, it began invest
aggressively in companies with direct strategic benefits for Intel as well as companies with
potential strategic advantages. (Harvard Business School, 2000b, 2)

Typically, Intel gets new investment proposals from entrepreneurs that can send business
plans by e-mail to Intel (proposal@intel.com). Also, new trends come from Intel’s own
marketing stuff, from research projects and informal networks that employees have.
Investment process follows a direct plan. First Intel and the other party meet in deal
concept meeting and if the deal has strategic and financial promises, Intel starts deal
negotiation and technical due diligence. Investment Project Authorization meeting
considers, what Intel will receive and what it will give and how to measure the success of
the investment. After the meeting the negotiation continues and if deal still seems to be
promising, parties enter into a contract. (Harvard Business School, 2000b, 3-4)

Besides Cisco, Intel is the other company that has increased its R&D investments
remarkably during the last decade (Figure 12). It shows in patent figures, too. The number
of issued patents to Intel has increased every year and was around 5000 patents worldwide
in 2005, which refers that Intel’s exploratory research strategy has been successful for
them.
29

45,000 6,000
40,000
5,000
35,000
30,000 4,000

Patents
25,000
M$

3,000
20,000
15,000 2,000
10,000
1,000
5,000
0 0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Revenue R&D expenses Patents (publications)

Figure 12. Intel’s revenues, R&D investments and number of issued patents during the
period of 1996-2005

7 LUCENT: NEW VENTURES GROUP

Lucent Technologies was spun off by AT&T in 1996, but its history starts already in 1869.
In 2006, Lucent merged with Alcatel and became Alcatel-Lucent. (Alcatel-Lucent, 2007)
Lucent designs and delivers the systems, services and software for communications
networks. Supported by Bell Labs research and development, its core competences are in
mobility, optical, access, data and voice networking technologies and services. (Lucent,
2006)

Lucent Technologies created New Venture Group (NVG) in 1997 for commercialise those
innovations from Bell Labs that do not fit in Lucent’s current businesses. Lucent’s
venturing model is mixed from ordinary corporate venturing and private venturing. With
this innovative design Lucent could utilize the advantages of both corporate venture, such
as long time period, scale of funding, coordination of complementaries and group learning,
and venture capital, such as incentive intensity, financial discipline and discovering
alternative business models. A big change from previous organization was the cultural
change, which includes more entrepreneurial spirit with fast decisions and individual risk
taking. (Chesbrough, 2000)
30

Figure 13 compares the NVG model of Lucent with internal business development and
private venture capital models. Even if NVG has adopted good working patterns from
private venture capital company, the model include also features from ordinary business
development. For example, there is not any fixed fund period and former employees are
able to return to Lucent, if the venture fails. Then Lucent can exploit the group learning
effect from the experience of its ventures. NVG works closely with the business units of
Lucent. It exploits Lucent’s resources, but it is free to choose any business model it likes
for its ventures. (Chesbrough, 2000)

Comment on
NVG location
Attribute BD VC

Incentive intensity NVG Pseudo-equity used

Financial discipline on NVG Staged funding used


Downside

Monitoring NVG Outside VCs, board

Discovering alt. Outside board, CEO


Business models NVG
Time horizon No specific time length
NVG
Scale of capital Shifting towards larger
invested NVG deals

Coordination of Increasing re-acquisitions


complementaries NVG
Retention of group Limited career downside
learning NVG risk

Figure 13. The model of New Venture Group in comparison with internal business
development (BD) and private venture capital models (Chesbrough, 2000, 43)

NVG was financial success with 35 venture launches. But due to the difficult corporation
situation in telecommunication business, Lucent had to concentrate only key business areas
and it spun NVG out. The other reason for spin-out was that NVG had been grown so big,
that it was difficult to forecast the lumpy cash requirements of ventures. The In 2002,
Lucent sold 80 % of the companies of New Venture Group to Coller Capital, private
venture capital company. Lucent and Coller Capital formed partnership called New
Venture Partners. As an independent venture group NVP can observe ideas also outside the
31

Bell Labs and Lucent can focus on their core businesses, but the same time preserve an
opportunity to alternative paths to market for their technologies. (Chesbrough, 2003)

Lucent’s situation was very difficult in the last decade and it was not the healthy company
at all, therefore it is not maybe a good example of the success of the open innovation. On
the other hand, even the worst companies could have parts that are world-class, like Lucent
had its unique venturing group. Revenues decreased dramatically after the millennium and
the same happened with R&D investments and yearly published patents (Figure 14). The
biggest leap happened between 2001- 2002. The number of issued patents was almost 4000
in 2001 while it was only 2300 in 2002. At the same year, Lucent sold its New Venture
Group. The development led the merging of Alcatel and Lucent.

45,000 4,500
40,000 4,000
35,000 3,500
30,000 3,000

Patents
25,000 2,500
M$

20,000 2,000
15,000 1,500
10,000 1,000
5,000 500
0 0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Revenue R&D expenses Patents (publications)

Figure 14. Lucent’s revenues, R&D investments and number of issued patents during the
period of 1996-2005

8 PROCTER&GAMBLE: CONNECT & DEVELOP

Procter & Gamble is the manufacturer of consumer goods in three business areas: beauty,
family health and household care. It markets about 300 brands in over 160 countries.
P&G‘s strategy aims to growth and strengthening the core competences - branding,
innovation, go-to-market know-how and scale. P&G received $56.7 billion revenue in
32

2005 and its total assets were $20.3 billion. Research and development costs were $1.9
billion in 2005 and the company employed about 7500 R&D persons. (P&G, 2006a)

P&G launched a new strategy in 1999, Organization 2005, which included C&D approach.
The growth strategy based on innovation, which are based on connections, is not a new
approach, but the organizational practices and technological media that assists the
implementation of this strategy in P&G is unique. (Dodgson et al., 2006). Procter &
Gamble has turned a term Research & Development into Connect &Develop. They are
looking for new innovations and invention from external resources, but the term also refers
that they have to connect their own technologies much better. P&G tries to build global
innovation network and accelerate their own internal research and development with
seeking ideas and innovations outside the company- from individuals, companies and
institutes. Variety of internal and external activities is helping P&G to connect with the
world (Figure 15).( Sakkab, 2002)

Global Corporate
Technology Innovation
Commun Technology
Council Fund e-Commerce
ities of Entrepreneurs
Practice

Internal Ventures Internet Technology


Smart Learning Market Place,
Reports Yet2.com
P&G
Connections for
InnovationNet Innovation
University Research Fellow
Joint Developments Program

National Laboratories Patent/IP Licensing/Donation


External
Technology Acquisition Endorsements
Group
Critical supplier Partnerships
Complementary Technology
Innovations
Ultimate supply system

Figure 15. P&G’s global innovation network (Sakkab, 2002, 40)


33

For internal connections, P&G has created Global Technology Council, where technology
directors from business units and R&D leaders explore ways to leverage their technologies.
P&G has global internal innovation community on the Internet, “InnovationNet” where
researchers can share information and ideas. It offers Smart Learning Reports available to
all researchers. P&G has also created Communities of Practice for making connections
across their business units. (Sakkab, 2002)

P&G has turned approximately 80 of its R&D employees to “technology scouts” or


“Technology Entrepreneurs”who are searching for new opportunities and the company is
the member of the e-R&D communities (Yet2.com and InnoCentive). Other external
connections in P&G are “Joint Technology Developments” with other companies and
institutions and “Critical supplier Partnerships” with suppliers. P&G licenses its
technologies in order to make extra revenue and access to complementary technologies.
The company licenses all its technologies at the latest three years after market introduction
of five years after patent approval. Patent and intellectual donation and different
endorsement are also used in P&G. In addition, the company also collaborates with
government and universities. It has University Research Fellow Program and it works with
national laboratories. Further, it has internal Corporate Innovation fund and Internet
venture Fund for internal and external ventures. (P&G, 2006b; Sakkab, 2002)

The number of yearly issued patents of P&G has turned down during the last decade
(Figure 16). However, P&G’s revenue has increased during the whole period and it is still
gaining approximately 4 500 patents every year. The impact of its external innovation
network and P&G’s strategy to license in and acquire new products and market them as a
P&G brands show in figures; even if the number of issued patents decreases, revenues
increase, especially after strategic change.
34

60,000 9,000
8,000
50,000
7,000
40,000 6,000

Patents
5,000
M$

30,000
4,000
20,000 3,000
2,000
10,000
1,000
0 0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Revenue R&D expenses Patents (publications)

Figure 16. P&G’s revenues, R&D investments and number of issued patents during the
period of 1996-2005

9 PHILIPS: ENTHUSIASM FOR OPEN INNOVATION CONCEPTS

Philips Group Corporation is the largest electronics company in the Europe. In 2005, it
revenue was €30 billion, total assets were €33 billion and it employs approximate 160 000
persons in over 60 countries. Philips has operated since 1891. It is concentrating on three
main areas: healthcare, lifestyle and technology. The mission of the company is to improve
people’s everyday life through meaningful innovations and its strategy is also based on
innovation, where key characteristics are the re-allocation of resources, the leverage of
brands and core competences, partnerships with key customers and suppliers, strong
intellectual property position, business transformation and operational excellence. Philips
has divided its businesses into six categories: Domestic Appliances and Personal care,
DAP (7 % from total sales), Lighting (16 %), Semiconductors (15 %), Medical systems (21
%), Consumer Electronics (28 %) and other activities (7 %). Because of this wide range of
business areas synergies are important to Philips. (Philips, 2006a, 14, 15, 131,)

Philips spent €2.6 billion to research and development in 2005. It has research laboratories
in the Netherlands, Germany, the United Kingdom, USA, China and India with 2100
employees. In the resent years, Philips has moved towards product-oriented R&D and
directed resources to projects with short-term commercial prospects. (Philips, 2006a, 46)
35

To Philips, the most important aspect of open innovation is collaboration. It has had co-
operation projects with other companies since 70s’and nowadays it offers co-operation to
academic institutes and companies in many ways. It favours joint ventures as a
collaboration form (Tidd et al, 2005, 291). The most important effort of openness is
perhaps Philips’research centre, High Tech Campus in Eindhoven. It offers a highly
innovative infrastructure, active engineering support as well as opportunities to work with
Philips’researchers to the other companies and institutes. There are facilities suitable for
start-ups, such as technology incubator and MiPlaza, which offers facilities for the research
of nanotechnology and Microsystems. (Philips, 2004)

Philips is highly encouraging its workers to found ventures. Technology Incubator is


designed for Philips’technologies and Philips’own employees to create new ventures from
promising research projects and technologies that are not suitable for core businesses. The
incubator offers funding, facilities, business planning and partnerships to new start-ups. In
addition, Philips Research and New Venture Partners, LLC made an agreement to create
more spin-offs from Philips’research activities. (Philips, 2004; Philips, 2007)

Philips has also licensing activities. They have pro-active IP strategy that aims to share
technologies by licensing rather than keep patents just for defence own mechanisms. Other
method for managing non-core IP is strategic alliances. For example, Philips has joint
venture with LED and LG Electronics. (Philips, 2004)

Philips’really tries to implement this open innovation thinking to the whole company. It
has dedicated one issue of Philips Research Password Magazine to Open Innovation and it
is the only company of these six in this examination that mentions open innovation in its
annual report. Vice president of Philips research, Jan van den Biesen (2004) sees that
Philips is moving towards open innovation by replacing the outdated linear innovation
model to a more open and simple one (Figure 17), allowing aid for open innovation by
large firms, facilitating public-private partnerships, stimulating the public private mobility
of researchers, redirecting state aid to research and innovation, allow innovation aid for
SME and large firm alike and ensuring level playing field worldwide.
36

Fundamental Industrial Pre-competitive


Research Research Development Market

Fundamental Industrial R&D


Research Market

Figure 17. The outdated, linear innovation model (1) and the new, more open and simple
innovation model (2) (Biesen, 2004)

Philips is an example of a company, which revenue and R&D investments has stayed
almost the same during the examined period, but it has been able to receive more and more
patents every year (Figure 18). Lately, it has received more patents than any other
examined company. Also Philips has adopted open innovation as a part of its R&D
strategy and it relies on research collaboration and spinning out new ventures.

60,000 16,000

14,000
50,000
12,000
40,000
10,000
Patents
M$

30,000 8,000

6,000
20,000
4,000
10,000
2,000

0 0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Revenue R&D expenses Patents (publications)

Figure 18. Philips’s revenues, R&D investments and number of issued patents during the
period of 1996-2005
37

10 SUN MICROSYSTEMS: OPEN SOURCE FOR STAYING IN THE


GAME

Sun Microsystems’revenue was $11 billion while total assets were $14 billion in 2005
(Sun, 2006, 62-63). Sun is concentrating on providing network computing solution and
services including infrastructure solutions (software and hardware), network storage
systems, support services and client solutions and educational services. Sun’s business
strategy is based on ones again - innovation. They highlight for instance ongoing
innovation, the development of end-to-end architecture, robust partnership community and
open source development. (Sun, 2006a, 5-6)

Sun invests strongly in R&D. The company spent 1.78 billion to it in 2005 and has
research facilities in USA, U.K, Ireland, Germany, Japan, Norway and India. (Sun, 2006a,
12) The fundamental parts of Sun’s culture are invention, openness, community, sharing,
freedom and collaboration.

In resent years, Sun Microsystems has moved strongly towards the open source
development. It has released its software products as an open source, including its
operating system Solaris10 and application Open Office. The company has announced that
it will release most of its technologies as an open source and it goes even further than that
by releasing also its hardware. Sun will release its design of the latest microprocessor,
Ultrasparc T1, which means that it is free to use without licensing fees. It is probably the
most expensive investment in hardware that has been released as open source. By doing
this Sun aims to get more clients, engineers, programmers and other users using its
technology. (Lamarca, 2006) Lysecky (2006) argues that this open source movement could
be a huge step in the development of a new business model and natural extension to open
source software development.

By opening its software, Sun tries to attract independent developers. Without opening
Solaris, Sun would have to produce all element of the product by itself and that would
make it more slowly, more costly and less innovative than Linux that is an open system. So
Sun opened up to save its business. Open source could be effective way to create the
broader community of the users of one’s own solutions and applications, which is essential
in the computing business. (Economist, 2005) But making money with open source is still
38

an open question. Companies can make money by selling products that support free open
source and offering consulting services (usually open source products are not customer-
ready). Open source development has also said to be more efficient method for product
development and it is based on an idea that other can fix problems we can not. Open source
is often used by the companies too small to compete commercially in primary segment or
companies that lagging behind the leader and want to be known, such as Sun. It is
particularly useful to “something that everybody needs, but none can make money of it”-
situations, which means that companies do not have to reinvent wheel again and costs
decrease. (Lamarca, 2006) The big question mark for Sun is that will this openness work
for it. It is risky to reveal so many secrets. The vice president of Sun, Sunil Joshi has said
“Years from now someone could out-innovate us, and if they do, glory to them. “
(Economist, 2005)

Sun succeeded well in 90s’and its revenues and the amount of issued patents increased,
but the positive development turned down in 2001 (Figure 19). The year was bad to many
other companies as well, but Sun has not been able to turn the development to positive
again, even if R&D investments have stayed the same. Sun faces a tight competition from
other companies, especially Linux, and it is decided to implement open source strategy to
stay in business.

20,000 3,000
18,000
2,500
16,000
14,000
2,000
12,000
Patents
M$

10,000 1,500
8,000
1,000
6,000
4,000
500
2,000
0 0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Revenue R&D expenses Patents (publications)

Figure 19. Sun’s revenues, R&D investments and number of issued patents during the
period of 1996-2005
39

11 UTILIZATION OF OPEN INNOVATION: COMPARISON OF THE


COMPANIES

In this chapter, the previous cases are collected and the way the companies utilize the
opportunities of the open innovation are summarized. In this part, it is also observed, does
the companies that are open in some way, utilize also other opportunities of open
innovation. If the collaboration, alliances and venture capital is considered, all companies
practice these in some extent, while open source as a part of the strategy is used only by
IBM and Sun.

11.1 Open source

IBM is an example of open source initiatives that represents spinout and selling
complements approaches (see chapter 2.2.4). Example of this is the releasing of 500
patents and there also are two examples in the Java programming language development,
Jikes and Eclipse project that are spun out from IBM. Both initiatives generate the demand
for other IBM’s product and services and they both compete against Sun, since Java is
developed by Sun. (West & Gallagher, 2006) IBM has also pooled R&D investments to
open source, for instance Linux represents this approach.

To IBM open source is not as large part of the business strategy as it is to Sun, but it is still
a significant strategic leap to a new business model. Sun has been in trouble lately, since
the IT sector, where it operates, is very competitive. Also Sun’s approach to open source is
spinouts and it has opened for example operating system Solaris and application Open
office.

Open source is not just an IP strategy or something that has to be done to stay in business.
It is also a way to collaborate with other companies as well. Steven Weber, a political
scientist at Berkeley and author of "The Success of Open Source" (Economist, 2006) lists
three reasons for more co-operative thinking. Because of growing complexity companies
need innovations also from other companies and their have to make sure that their IT
systems work together. The other reason is convergence that drives IT companies to
40

collaboration. Third reason is that IT firms disaggregate to niche firm and IT products and
services are becoming more modular and interchangeable

11.2 Licensing

IBM, Intel and Sun operate partly in the same markets, but all three have different
licensing strategies. IBM’s aggressive licensing strategy, and a world largest patent
portfolio and almost $2 billions revenue from licensing is already discussed. Even if Intel
is very active to search external innovations, it does not push its innovations to markets
with external channels. It does cross-licensing, which is important in computing and IT
industry and it is committed to license its patents if required by industry groups, but it does
not try to receive revenue from licensing. Because of Sun’s strong open source approach to
the innovation push, ordinary licensing is not so vital to it either.

Cisco and Lucent, competitors in the networking industry, have also different licensing
politics. Cisco is, like Intel, oriented to inbound of the open innovation. It announces in its
annual report that it could licence in a promising technology, but not mention the out-
licensing (Cisco, 2006). On the other hand, Cisco’s rival, Lucent, has gained revenues from
patent licensing, although, the revenue is not large, about $ 113 million in 2005 (1.2 %
from total revenue) (Lucent, 2006).

Non-ICT companies, Philips, DuPont and P&G, have proactive licensing activities like
IBM does. Especially DuPont with its technology bank licenses its technologies actively.
Philips has also technology licensing team. To P&G licensing is a part of its innovation
network and it is a participant in marketplace for selling and buying technologies
.

11.3 Venture Capital, Spin-offs and Start-ups

The number of Venture Capital investors has been risen for the past decade and companies
have created their own VC systems for keeping new technology opportunities close to
them. Lucent’s innovative corporate venturing system, New Venture Group that invested
in promising technologies from the Bell Labs, is probably the best example of venture
41

capital models. Although, it is now sold and functions now as an independent venturing
company, New Ventures Partners.

Philips has made a partnership with the corporate venturing firm New Venture Partners
(NVP). The goal is to create new spin-off businesses from Philips’technologies, which are
not the part of the core business. (Philips, 2005) Philips’s MiPlaza and technology
incubator are also created to help start-up companies. Venture capitalists are also the part
of P&G’s innovation network.

Intel invests in promising technology companies worldwide to promote their strategy to


enable innovation. It is a one of the largest venture capital companies in the world and has
invested more than 4 billion dollars in about 1000 companies (Intel Capital). Sun's $400M
Venture & Strategic Investment fund invests in global companies developing products,
markets and services based on Sun's technology and platforms. Sun also tends to partner
with leading venture capital firms and investment banks to identify minority investment
opportunities in companies fuelling the next generation of the internet. (Sun, 2006b)

DuPont ventures seeks options to identify and create new businesses by technology license
or a market co-operation with start-ups firms and leverage this way their business portfolio
(DuPont ventures, 2006). IBM has Venture capital group, too, and has partnership with
more than 950 start-ups, but it does not manage a fund as do other VC organizations.
Instead, it tells the VC community, and the startups, what types of technologies it is
interested in, and the direction of its business strategies. After that it just waits that other
companies will spin off technologies IBM is looking for. The CV community will invest in
start-ups, because after start-ups are growing little larges, they are able to sell the start-up
to IBM (or other large corporation) (Foremski, 2007) The acquisition and alliance strategy
does not prevent Cisco to invest in new start ups, too. For instance, in 2006, it invested
about $1 billion to new start-up fund managed by Softbank (Shinal & Himelstein, 2006).

11.4 Collaboration, alliances and acquisitions

In today’s business world where knowledge has spread and become more detailed and
product cycles are short collaboration and alliances with other companies are essential and
42

every company does it in some form or another. In this examination research collaboration
and strategic alliances are considered from open innovation point of view and it is taking
account only if collaboration with other companies and institutes is extremely strong and
differs from basic collaboration.

To Philips the most important sub-area of open innovation is collaboration. In Philips


Research Password Magazine Rich Harwig, CEO Philips Research (2004) announces
following “At Philips we have adopted Open Innovation as our method of working. We
team up with academic and industrial partners who have competencies and interests
complementary to our own, join forces with industry peers on standardization and create
momentum in the future directions of technology we jointly aspire to, and are active in
establishing strong local networks of leading industries and research institutes that help top
technology regions to grow.” Research collaboration is also important to Intel, because
their research is based heavily on external sources. P&G’s Connect&Develop attitude tells
about strong co-operation, too.

Besides acquisitions, Cisco leverages its knowledge with strategic alliances with industry
leaders. Alliances at Cisco have eight characteristics: partners are industry leaders, there
are many touch points between companies, cross value chain impact, joint technology
and/or solution to meet customers needs, long-term joint investments of resources and IP,
anticipate competitive threats, aim to create new global markets and IP and wave multiple
partners together to target new markets (Cisco, 2007)

Acquisition strategy is hard to implement and history has shown that the most of the
acquisition fail. Cisco has managed to create its success through acquisitions, though. It
has generated a successful management system for acquisitions that begins with
understanding and participating in the external ecosystem with possible target firms and
ends with managing the dynamics of integration. The acquisition strategy of Cisco is even
more remarkable as acquisitions in the information technology industry usually fail (such
as Lucent, Ericsson and Nortel) and Cisco is the only networking equipment firm with
solid finances. (Mayer & Kenney, 2004)

All of examined companies have co-operation with universities. It takes place through
grants, fellowships, paper publishing, shared research programs and other co-operative
43

programs. Every company have also formed joint ventures and other alliances with other
companies and those are an important form of open innovation, especially for companies in
the IT industry and high technology fields. Sun is said to be “the most partnered company
in the world”and IBM has 45 000 business partner. To P&G on the other hand alliances
are the part of the innovation network.

11.5 Summary

Table 4 summarizes the importance of the aspects of open innovation to Cisco, DuPont,
IBM, Intel, Lucent, Philips, P&G and Sun. The table illustrates, why these corporations are
selected in this report. So it does not consider the other aspects of the Open innovation that
companies utilize, too, for example as mentioned above, Lucent have gains small revenues
from out-licensing and almost all companies have some kinds of venturing activities.

Table 4. The use of open innovation

Firm Business Innovation push/open Innovation pull/exploratory research


model business models
Licensing Open Collaboration, Innovation Strategic Acquisitions
source Spinn-offs, VC networks alliances
Cisco Type 5 X X
DuPont Type 4 X
IBM Type 6 X X X
Intel Type 6 X X
Lucent Type 5 X
P&G Type 6 X
Philips Type 5 X X
Sun Type 5 X

We can divide the open innovation to two parts: innovation push and innovation pull. Push
refers to actions that aim to maximize value of companies’own innovations by offering
them to outside the boundaries of the company and in this study, it contains licensing and
open source. Pull, on the other hand, refers to exploratory research with innovation
networks, strategic alliances and acquisitions that aims to observe new ideas externally and
use other than company’s own research laboratories as a source of innovation.
Collaboration covers both push and pull of innovations; joint ventures, spin-offs and start-
ups are opportunities to bring inventions to markets with various channels (Philips’and
44

Lucent’s model) or collaboration with other parties, such universities, and offering venture
capital to promising start ups leverage the sources of innovations (Intel’s model).

In table 4, the estimated business type is also considered (see chapter 2.3 and table 3),
although the assessment of business models is challenging, because companies’business
models have characteristics from many types. Chesbrough (2006b) argues that IBM, Intel
and P&G function with the type 6 business model. IBM’s management of patent portfolio
by donating patents to open source communities and profitable out-licensing is unique.
P&G manages effectively the both exploration of external ideas and creations of value
form unused technologies. In addition, Intel’s business model contains parts of the type 6
business model; especially its out-to-in connections are the exemplar of this.

Firms with type 5 focus on new businesses and markets as well as current ones, innovation
is a business function and IP is managed as a financial asset (Chesbrough, 2006b, 126).
Cisco, Lucent and Philips are considered to be this type of companies with collaboration
and VC initiatives. Also Sun is positioned in this category, since type 5 business models
include those that actively build their business models that are based on external sources of
technology and co-operative development. DuPont is an example of type 4 business
model. It is model used by mature industrial R&D firms that have started to look
opportunities from outside the company and integrating customers and suppliers in the
innovation process (Chesbrough, 2006b, 123)

12 OPEN INNOVATION AND R&D

Even if all companies are large players, their sizes are very different from each other. They
are operating in different branches, only in some business areas they are competitors.
IBM, Intel and Sun are competing in some fields of IT business. Likewise Cisco and
Lucent are competitors in networking and communication. Philips’ business branch,
electronics, is close to them and DuPont is also in electronics and communication
businesses. P&G is little different from the others. It is concentrating on consumer goods.
In this section of the study, companies’R&D is analysed and companies are compared to
each other. The purpose is to try to find, how the different angles of the open innovation
have impacted on R&D expenditures and efficiency, which is examined through issued
45

patents and intangible assets. Some financial data used in this part of the study is gathered
in the appendix 1.

All of the companies are global players and operate worldwide. They also have R&D
facilities in more than one continent. Besides USA and Europe companies are expanding
their research to Asia. Particularly China and India interest companies.

Companies invest huge amounts to research and development (Figure 20). Innovations are
essential for survival in fast changing environment with tight competition. The companies
of the open innovation are not exception, even if the open innovation paradigm encourages
companies for look external innovations outside the boundaries of the company and R&D
collaboration, both activities that could reduce the costs of new product development. The
open approach does not decrease the R&D investments but direct them differently and the
importance of internal research and development should not be underestimated.

25.0

20.0

15.0
%

10.0

5.0

0.0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Cisco DuPont IBM Intel Lucent P&G Philips Sun

Figure 20. R&D investments/revenue during the period of 1996-2005

Largest R&D expenses were in IBM, which has invested approximately $5-6 billion in
R&D every year, but since the large revenues of IBM, it means only about 6% of the
revenue (Figure X). When observed R&D investments as the percentages of revenue, there
are companies that much larger percentages. Cisco, Lucent and Sun have spent over 10 per
cent of their revenue to R&D. However, the percentage is probably so high, because of low
revenues. In Cisco’s case, it is shown that acquisitions have not replaced internal R&D:
46

Cisco generates two-third of its IP internally and one-third through acquisitions (Mayer &
Kenney, 2004) Also Intel’s R&D investment has become bigger. The extent of R&D
investment is also industry related. Companies in high tech –industries, such as
communication and computer technology fields invest more that for instance P&G in
consumer goods.

All in all, the investments to R&D have not changes a lot during the past ten years. In a
long run, all companies are increased the R&D investment. It does not show in the figure,
because the revenues have been changing, too, but the most remarkable increasing of R&D
investments is done by Cisco (from $ 400 millions to over $ 3 300 millions) and Intel
(from $ 1 800 millions to over 5 100 millions).

The efficiency of R&D in companies is analyzed by observing patents that the companies
have received during the examined period. To collect patent information, two databases
have been used, Software for Intellectual Property (SIP) and United States Patent and
Trademark Office (USPTO). SIP is a software solution that offers services for the creation
of patent strategy. Services include for instance patent data search and observation of
patent families and the legal status of patents. SIP database contains publicly available data
from several sources, for example Inpadoc database, US patent and trademark office,
European Patent Office and German Patent and Trademark Office. Both databases enable
the search by applicants name and a certain time period. (SIP, 2007)

Figure 21 describes the number of issued patents that companies have received during the
examined period. In the upper diagram, only the patent of US are took into account (data
from USPTO). IBM’s position as a patent leader in United States is undeniable. The lower
diagram illustrates the number of the patents of companies worldwide, which was analyzed
already in case chapters, but is now combined to the same picture (Data from SIP). There,
IBM loses its leading position, first to P&G and then to Philips. The same patent
information about worldwide patents is also offered in case chapters earlier.

The analysis is done with issued patents. Someone may argue that the number of patent
applications would have been better indicator, since the yearly performance of R&D is
observed and it could take a few years before the applied patent is issued. However, if the
applied patents would have been used, the number of patents would have decreased in the
47

latest years, because the patent databases show only the patents that have already been
issued. So there would have been distortion that patent applications have been decreased. It
is not true, but the applications of latest years have not been handled yet in patent offices
and that is why they do not show in the patent databases yet.

US

4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Cisco DuPont IBM Intel Lucent P&G Philips Sun

All

16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Cisco DuPont IBM Intel Lucent P&G Philips Sun


Figure 21. Number of issued patents in US and worldwide during the period of 1996-2005

The companies that have adopted external searching of innovations have increased their
patent figures. Cisco, Intel, IBM and Philips all emphasize exploratory search and have
increased yearly issued patents every year. DuPont’s number of issued patents has stayed
in the same level during the whole period. In the light of patents, Lucent, P&G and Sun
have done little worst and the number of issued patents has decreased.
48

Besides just patents, it is also interesting to analyze the amount of all intangible assets. In
Figure 22, intangible assets are illustrated as the percentage of all assets. The numbers are
from the balance sheets of companies. The value of these assets lies in the future returns
and as mentioned before intangible asset will be even more important to companies in the
future, hence the future competition advantages and success is greatly based on these
assets. Intangible assets contain for instance the goodwill/badwill of assets purchased and
intellectual property right (patents, trademarks, copyrights etc.).

45.00
40.00
35.00
30.00
25.00
%

20.00
15.00
10.00
5.00
0.00
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Cisco DuPont IBM Intel Lucent P&G Philips Sun

Figure 22. Intangible assets as percentage from total assets during the period of 1996-2005

According to Ned Davis Research the industrial economy is turned to the knowledge
economy during the past thirty years. While only about 20 per cent of the market value of
S&P 500 companies was composed of intangible assets in 1975, the figure is now over 80
per cent. (Ocean Tomo, 2007). Also our study shows that the proportion of intangible
assets from total assets has been increasing during the examined period. In the 90’some
companies did not even inform the amount of intangibles, but in last year the average
proportion of intangible assets were over 15 per cent.

The patent analyses above were not very flattering for P&G (number of issued patents has
decreased), but observation of the all intangible assets reveals that the company has not
forgotten its future. P&G has a largest percentage of intangible assets; almost 40 % of its
49

assets are intangible in 2005. From that proportion over 80 per cent is goodwill (P&G,
2005). With P&G’s C&D philosophy, it has licensed in and acquired many products from
other companies, which increases its proportion of intangible assets. In this comparison as
well, it is important to notice that the companies operate in different business fields and the
amortizations of intangible assets differ, which has its impact on these figures.

Cisco’s large proportion of intangibles is explained by its acquisition strategy. From the all
intangible assets, the proportion of goodwill in Cisco is approximately 90 % (Cisco, 2005).
A large proportion from intangible assets is goodwill in other companies, too. Therefore
patent leaders IBM and Philips that has not the particularly large amount of goodwill in
their balance sheet, does not stand out from the rest.
50

13 CONCLUSIONS

Even before the launch of Open Innovation, many scholars have suggested companies to
open up their boundaries. In addition, the elements of the open innovation are not new to
the business world, either, and it is more like a rule than an exception to form joint
ventures and alliances, collaborate with universities, government institutes and companies
as well and fund SMEs and start-ups. But companies studied in this paper do more than
that and have become examples of the open innovation. They have managed to create more
open business models. Many of them have been success stories (Cisco, IBM, Intel, P&G,
Philips), and even if some companies have not succeeded lately, they business models
contains some examples of the elements of the new and bold open approach (Lucent, Sun)
Figure 23 illustrates in which sub-areas of the open innovation these companies have
succeeded the best. Of course they function actively in other area, too (for example Philips
licenses its technologies), but it is not the thing they are the most famous for.
Development Maturity
Research

Venture capital SUN, IBM


project
LUCENT; INTEL open source
or idea

collaboration licensing

DUPONT, IBM, P&G

PHILIPS, P&G,
CISCO

use of external sources The boundaries


of a firm
INTEL, P&G
Acquisitions

CISCO

Figure 23. The positions of studied companies in the open innovation paradigm
51

IBM and DuPont receive approximately one percent of their revenue from licensing their
IP. Sun has different approach to IP management and it believes open source strategy and
gives most of its technologies for free rather than licensing those. Cisco, Intel, and P&G
are the other side of open innovation paradigm as searchers for external inventions, ideas
and opportunities. To Philips open innovation is collaboration and the company strongly
supports co-operation with all parties of the business, which is also the purpose of P&G’s
global innovation network. In addition, Cisco relays on collaboration and have the strong
network of strategic alliances.

Companies that actively utilize external sources of innovation have increased the number
of issued patents and the proportion of intangible assets almost every year during the
examined period. These measures does not guarantee the future success, but as business
landscape changes more and more towards knowledge based, it gives us a good review,
who is going to win the competition.

The results of analyzing issued patents numbers and the amount of intangible assets are
also only suggestive by nature. If the further, detailed information about the impacts of the
open innovation to R&D activities is wanted, acquisitions and strategic alliances should be
examined. Likewise, the further information about the impacts of in- and out-licensing not
only to the cash flow but also to the R&D is needed.

The use of open innovation is not only dependent on strategic choices. Companies
examined in this paper are in different industries or at least partly in different businesses
and their sizes are not similar. Five out of eight companies, Cisco, IBM, Intel, Lucent and
Sun, are related to ICT sector. Philips operates in electronics industry, P&G business is
consumer goods and DuPont is a material supplier in many fields. It is clear that their
implementation of the open innovation differs from each other. For instance the open
source development in P&G would be difficult. Not all companies have to be like Big
Blue, IBM and exploit the new paradigm in every possible way. Companies have to find
the way that is the most suitable for its business model and strategy. The bottom line is
value creation. All actions taken towards openness should create value to the company. It
is always a risk to open boundaries of the firm, but in our fast chancing global world it is
also risky not to do so. The essential question is how to find balance between openness and
closed.
52

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APPENDIX 1:Financial figures

Revenue (M$) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Cisco 4096 6440 8459 12154 18928 22293 18915 18878 22045 24801
DuPont 38349 39730 24767 26918 28268 24726 24006 26996 27340 26639
IBM 75947 78508 81667 87548 88396 85866 81186 89131 96293 91134
Intel 20847 25070 26273 29389 33726 26539 26764 30141 34209 38826
Lucent 23286 26360 30147 38303 33813 21294 12321 8470 9045 9441
P&G 35284 35764 37154 38125 39951 39244 40238 43377 51407 56741
Philips 41100 45411 39869 41178 49560 42330 41651 38008 39686 39786
Sun 7095 8598 9791 11726 15721 18250 12496 11434 11185 11070
Average 30751 33235 32266 35668 38545 35068 32197 33304 36401 37305

EBITDA (M$) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Cisco 1597 2101 2630 3802 4675 1362 4508 6604 8435 9045
DuPont 8646 7025 4307 3780 5799 9231 3941 2064 3190 5326
IBM 14315 14756 14745 19069 17246 16011 12048 15720 17082 17109
Intel 9847 12878 11978 14861 20011 8584 9385 12574 15356 17224
Lucent 359 3321 3957 7458 5350 -17210 -5688 339 2152 2004
P&G 6511 7193 7854 8636 8449 7681 8679 9794 11712 13157
Philips 3163 5221 3272 4985 11373 546 656 2860 4806 4754
Sun 1002 1470 1618 2233 3631 2913 -113 -1608 1268 631
Average 5680 6746 6295 8103 9567 3640 4177 6043 8000 8656

R&D 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
investments
(M$)
Cisco 402 702 1026 1594 4077 4777 3513 3139 3195 3348
DuPont 1032 2594 2751 3867 1787 1588 1264 1349 1333 1336
IBM 5089 4877 5046 5273 5151 5290 4750 5077 5673 5842
Intel 1808 2347 2509 3111 3897 3796 4034 4360 4778 5145
Lucent 4047 4047 5094 4792 5023 3520 2310 1488 1284 1177
P&G 1399 1469 1546 1726 1899 1769 1601 1665 1802 1940
Philips 2795 2815 2671 3006 3618 4318 3998 3497 3413 3342
Sun 653 826 1190 1383 1642 2093 1835 1841 1996 1785
Average 2153 2460 2729 3094 3387 3394 2913 2802 2934 2989

Patents (all) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Cisco 24 23 46 63 151 197 261 544 963 1301
DuPont 2057 1998 2037 2275 2215 2138 1280 2027 2495 1812
IBM 4940 3978 4878 5528 6277 6423 8721 10037 9615 9943
Intel 731 907 1304 1486 1862 2193 2839 4349 4834 5141
Lucent 297 1226 1696 2606 4257 3924 2314 1802 1757 1853
P&G 4580 5264 6073 7430 7879 7055 6563 6080 5138 4481
Philips 3294 3768 3800 4275 5175 5937 8260 11955 12989 13895
Sun 313 556 914 1330 1504 1737 2078 2475 2246 1541
Issued 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
patents(US)
Cisco 3 6 32 50 129 184 240 364 445 461
DuPont 412 326 393 340 337 340 318 340 328 248
IBM 1,895 1,758 2,630 2,784 2,892 3,507 3,314 3,403 3,251 2,962
Intel 424 407 712 746 809 820 1,092 1,602 1,606 1,553
Lucent 298 818 946 1,157 1,424 1,129 672 629 545 407
P&G 339 419 486 599 532 485 480 486 443 341
Philips 74 87 118 126 148 189 897 1,412 1,250 792
Sun 113 162 439 577 471 443 508 583 685 652

Intangible 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
assets (M$)
Cisco n/a n/a n/a 460 4087 4659 4362 4599 4523 5844
DuPont 221 1285 2566 8724 8365 6897 4276 4925 4930 4771
IBM 2502 1769 1544 1708 1630 2241 5511 8645 10226 11104
Intel n/a n/a n/a 4934 5941 5344 5164 4364 4396 4527
Lucent n/a n/a n/a 960 6 463 1 466 224 188 434 419
P&G 4281 3949 7011 6822 8786 8300 13430 13507 23900 24163
Philips 1861 2100 718 3656 4230 7107 6393 4879 3498 5132
Sun 233 169 263 n/a 205 2312 2286 901 888 744

Total Assets 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
(M$)
Cisco 3614 5386 8860 14814 32870 33924 36132 35631 34464 32682
DuPont 37864 42715 38130 40314 38964 40006 34180 35985 34399 32113
IBM 77886 78336 83179 84841 85381 85918 92170 100169 106159 103916
Intel 23735 28880 31471 43849 47945 44395 44224 47143 48143 48279
Lucent 22626 23811 29363 38775 47512 33664 17791 15765 16963 16400
P&G 27730 27544 30966 32113 34194 34387 40776 43706 57048 61527
Philips 31515 34084 35855 37363 48749 47903 40343 35738 37911 41899
Sun 3801 4697 5711 8420 14152 18181 16367 12985 14503 14190
Sari Viskari, Pekka Salmi and Marko Torkkeli

IMPLEMENTATION OF OPEN INNOVATION PARADIGM


Cases: Cisco Systems, DuPont, IBM,Intel,
Lucent, P&G, Philips and Sun Microsystems

LAPPEENRANNAN LAPPEENRANTA
TEKNILLINEN YLIOPISTO UNIVERSITY OF TECHNOLOGY

Lappeenrannan teknillinen yliopisto TEKNISTALOUDELLINEN TIEDEKUNTA TUTKIMUSRAPORTTI 189


Digipaino 2007 TUOTANTOTALOUDEN OSASTO RESEARCH REPORT
ISBN 978-952-214- 478-2 (paperback)
ISBN 978-952-214- 479-9 (PDF) FACULTY OF TECHNOLOGY MANAGEMENT
DEPARTMENT OF INDUSTRIAL MANAGEMENT
ISSN 1459-3173

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