Interview with Henry Chesbrough, the father of open innovation



but the CEO good to see you too so good morning professor Henry Chesbrough Henry it's a great great pressure to have you here to talk about in it to work about innovation in the energy field just let me let me tell you an uneven talk that it happens to me this morning in my nine-year-old daughter she asked me this morning what are you going to do today mommy say I have a very important meeting with a very important person and I said who is whisky and I said Henry Chesbrough and I showed you the book say you know Henry Cho that's the man who wrote this book I said like okay but then see Google do she took her iPad I see Google do Oh mommy she's really famous she's like Justin Bieber okay so it's it's it's fantastic because I don't know your singing skills we are not going to test it but you are the father of open innovation I mean a concept that today is worldwide known not only in the academia but also in the business world also the politicians so it's just just a starting question how all this has started because now you have this kind of impact but how the open innovation concept came to you how did you start researching about this topic well good morning and what a wonderful way to begin if open innovation becomes as popular as Justin Bieber then something good will have happened I'll be very happy where did it all begin I would say there are two places where it began for me one was before I became a professor I worked for many years in the computer industry and most of those years I spent in a hard disk drive company called quantum and we were a startup company in Silicon Valley and we were competing against much larger much more powerful companies like IBM but we were winning we were doing very well even though they were so strong and so powerful with so much intellectual property so much R&D investment and yet we were winning so that was something that was very influential for me the second piece I think began once I became a professor I was teaching at Harvard Business School and got permission to do an extended series of studies at Xerox Corporation particularly the Palo Alto Research Center or Park and I spent two years there meeting lots of people from many parts of Xerox and they gave me wonderful access and in the course of that time I began to see the same dynamic I saw a quantum but instead of being in the startup now I was looking at it from the perspective of the large company Xerox and I think these were the two places where open innovation really began to come alive for me was seeing it from both of these sides I mean back in time and that moment how did you ever think that open innovation was going to be so popular as it is today absolutely not in fact the year that my book came out in 2003 was the same year that Harvard kicked me out and did not give me tenure I had to leave and I went to Berkeley so I was not feeling like I was Justin Bieber I was feeling like oh boy maybe I failed here so I am of course today just delighted but at the time it was not at all clear how successful this was going to be well it's very similar what they're really a sing-off universe you know you try you don't know what is going to be the result yes and indeed you are I live in a sample of a false negative oh yeah good for you I very much agree with you let me say something about the false negative because this is a concept that has not gone as far I was hoping that it would lots of companies evaluate R&D projects at multiple stages on the journey from the laboratory to the market and they have these stages or stage gates they use as these evaluations are made and many times if a project gets all the way through each of these gates and it succeeds everybody's happy also if they go through every single gate but then that fails in the market people then go back and say what did we do wrong what did we miss what the Xerox work showed me was there was another possibility where you evaluate a project and you say no but in the case of Xerox some of those projects actually continued on their own without further funding from Xerox instead they got their funding from the venture capital community and a few of them actually became very successful so even though Xerox saw them first they did not see the value they did not see the possibility but other investors did see a possibility and made the investment and then they were able to be successful so those were the false negatives the ones that to you and your business don't look so promising but to other people looking at it another way they see value that the first group did not see and so Harvard looked at my work and they said you know this open innovation stuff from Chesbro I don't think it's going to be that important and so I had to go to Berkeley and then open innovation became very important and so Berkeley was very happy that's that's a really good luck for Burke yes and then more recently I came to Assad a also so now I spend some of my time at Berkeley but also some time at Assad a and I think it's also been good for Assad a yes to have open innovation here yes and think that I'm I I admire friend you is that I mean usefully and academia usually what scholars are said that we live in our ivory towers okay that we are we are talking about things that are very far away for an hour from the real world I think that you are living a sample of being able to create a theoretical framework I'm in a very sound research academic but but also have influence not only within the scholars and within the academia I mean open innovation is an equities concept that people in in the business world an innovation director from great big and small companies they know and even politicians I mean when they are thinking about how to create innovation policies they have the references open innovation McHenry chair group so I think that you are also an example for phone for the academia also in order to to see that many things that are happening in this in these centers in these academic centers I mean it they have impact in the real world so that's that's great talking about open innovation in in the energy sector you know that in the last year suddenly open innovation has become very popular in this energy industry I mean today you can't see open innovation directors in the major utilities and energy companies I mean it's neither the earlier energy EDP are examples of companies that they are implemented or adopting open innovation in their innovation strategy so which are your thoughts about that so let me first say a little bit about the impact of open innovation one of the benefits of me coming to a saw day is it's allowed me to see the situation in Europe more closely and I would say that the interest in open innovation is as great or greater here in Europe than it is even in the United States now and these political groups that are embracing open innovation I think are embracing it most strong here in Europe in the European Commission next week we have a conference at a sade called the world open innovation conference one of our keynote speakers is Commissioner Carlos Lloyd us.the from the DG of research science and innovation and he's going to be speaking at our conference on the three opens open science open innovation and open to the world he was a former student of mine when I was teaching at Harvard 20 years ago and now he's a keynote speaker at our conference so it's a great moment for the energy sector I also agree with your question that ten years ago nobody was talking about open innovation in the energy sector there was growing interest in green and renewable technologies and solar and photovoltaics geothermal hydro wind but these were technologies these were not new innovation processes but in the last few years the innovation processes and energy are starting to change and organizations are starting to collaborate in ways they did not before business models are starting to open up we're starting to see ecosystems of startups with large companies and regulators coming together to bring some of these new possibilities to consumers in the energy sector so it's a very exciting time to be looking at open innovation in the energy sector can we the energy industry it's very traditional I mean it's it's a kind of paradox on how that they their culture I mean very IP centric I mean known these closer agreements even the lawyers are coming very quickly when you're start talking to them so in this kind of environment is it possible to apply open innovation it's possible but it is challenging indeed for the reasons you say the energy sector really can be thought of as a natural monopoly where once you have made the investment to Jin megawatts or even gigawatts of power and then distribute them through these networks to millions of households there are natural economies of scale and that means these monopolies have to be regulated so that we don't take all the money away from people and give it all to the energy sector as a result the culture is not especially innovative monopolies are not known for being rapidly responsive to customers needs and indeed the energy companies often fund a lot of their capital with debt and if a company has a lot of debt on its balance sheet I think that constrains some of its ability to innovate because the people who are giving them the debt want to see a nice steady business very consistent not too much not too little not too exciting that's actually not the best environment for innovation and experimentation one company I have looked at very recently in Italy is a company called NL a leading energy utility company there who also owns about 70% of Endesa here in Spain so they have a very traditional background as well but in the green and renewable sectors they've become much more innovative and experimental in their work and so they are an example to me that says yes open innovation is possible in the energy sector if you can address some of the organizational challenges some of the financial challenges and ultimately the cultural challenges that come with embracing open innovation and Indians is there any characteristics that the organizational culture should have in order to adopt open innovation and to get the most of it I would say at least two things one is a willingness to share knowledge many organizations have grown through acquisition Enel would be one of these companies that has grown through acquisition many times when these entities are acquired knowledge is power so if I horde my knowledge that gives me influence in the organization if I share everything with you in this view I've given away my power to you but in an open innovation environment you want people sharing knowledge freely and openly so that we can take my knowledge and your knowledge and put them together to combine to make something new so instead of hoarding the knowledge we need a culture where sharing the knowledge is celebrated the second thing I think that has to change is a willingness to embrace failure in the innovation process you show me an organization that never fails and I will show you an organization that never innovates so we have to have a culture where it's okay to taketake experiments it's okay to try new things and we know that many of them are not going to work the first time but if we are learning from them and we share that learning widely back to the first point then we can begin to grow and adapt so that we find the things that do work and then we can innovate successfully ok so culture has to do with the sharing of that knowledge and also accepting that failure is part of the game yes I'm celebrating it and learning from it that's right perfect to start two challenges for the energy industry and for many large organizations I think one of the characteristics that the energy industry is taking in order to implement open innovation is to resort to a startups and to start collaborating with them this is something fantastic for us for energy as you know and we have supported 170 companies up to now and we really believe from there from the start that this collaboration is beneficial for both parties the startup which are very innovative very flexible happy to customize their product and and they are willing to take the risk okay in order to introduce diffractive innovation on the other hand we have the major companies the big companies that they have this access to the customer access to the market and and also they have the financial mass muscle and the financial strength to be able to take all this innovation and to a scale up into the market so have you what are your advices in this collaboration because it's very frequent but it's also very challenging so the first thing I would say is that the future of energy is going to require ecosystems of both large companies and startups so the work that you are doing at kick you know energy is crucial to the future of the sector small companies and startups are very quick very agile as you say they're willing to take risk and a market of 1 million euros for a start-up is an exciting market for a big energy company 1 million euros is too small to be interesting and the organization cannot move to to explore that so there's a natural benefit for large companies to engage with startup companies that do get excited by small markets and every major opportunity begins as a small market there's no significant business today that started at the very beginning in a way that was very very large they all start as small businesses but you're also correct that the large companies have critical resources that the startups really need one of course is the access to the end customer and access to capital and financial markets the regulatory environment and one thing from the perspective of a start-up is the ability to take a technology to scale to make it work in a very large volume in a way that's very reliable these are things that large companies are quite good at and are difficult for startups to master so there's a natural combination of these that I think can work very well and okay both of them are willing to collaborate the startup and the big company when the actual collaboration comes then they face a lot of challenges so which are the challenges that you have identified and of course how to face them how to overcome them one of the biggest challenges I see is the difference in time particularly the time to make a decision a startup company can decide in a day or certainly in a week to make a major shift in what it's doing but a large company often takes many weeks just to organize a meeting to then discuss the decision and in many of the large company situations the result of the first meeting is a decision to have a second meeting because maybe there are some other people that need to be included and it takes more weeks to find a date where everybody can come together and be at the meeting this drive startups crazy because they see the opportunity they're ready to engage with the large company and all they need is a decision from the large company to say yes let's go but the large company because of all the actors that have to be involved and we are going to try to take this to scale so you need to consult with many different people in the company I see you nodding you've seen this problem too this is the one of the biggest challenges I see a second challenge that I see is the question of intellectual property who is going to own what when a large company in a small company do something together the small company needs to own something or else they lose everything to the large company but the large company is going to take this project and put it across millions households so they also need some protection or some access to the technology as well so this is something that's very delicate and has to be sorted out as well and how to sort it out there are a number of different models the one that I am the most familiar with is you have your technology I have my technology and then we create something jointly together so you keep yours I keep mine but we share what we create together maybe you own it but I get a license to it that's royalty-free so that I can use it too without having to pay additional money when I collaborated with you that was my payment to you for the technology so some kind of arrangement like this is what I see often in these cases and of course the startup has no money so they cannot really give money to the large company but the startup does have talent and speed and so they're often a very good way to test these new possibilities at small scale in ways that large companies take a long time to do internally so the startup community can be a testbed for the large companies in a range of technologies if we can overcome the time to decide and these intellectual property questions one of the problems that also I have with net witness is that from the innovation department of the company they are really eager and they see all these mutual benefits and then they are really willing to say okay if there are challenges we will solve it but then they go to the business unit to the people who are on the ground in the sales and and they look for the of course there then they let's say like them they okay of day of these departments of the business units and then there is also a gap there there is also some time some time of tension the innovation in the this is a great opportunity for us but then the business line or the business units people they don't see it or they they are very far away from collaborating with in a small company and a startup who are they they are coming from outside how to solve this so this is a problem inside large companies both when they deal with external parties from outside or when they deal with internal innovation groups as well it really is the same problem because the business unit is being measured on their performance now today this month this quarter this year and many of these innovation opportunities are about the future they're about tomorrow next year next three years next five years and the business manager says in five years I'll be in another part of the company so I give you my time now maybe I take the risk of working with you but the benefit will not come to me the benefit will come to the person after me so if it doesn't work maybe I am punished but if it does work the benefit goes to somebody else so you can see why there's a problem there in doing this and part of the problem is how companies manage the current businesses often there's no scope for the current businesses to take these risks to invest some of these monies that might cause the current performance to go down a little bit and this I think is one of the challenges for the large company whether they're dealing with an internal innovation group or an external startup so somehow it would be a possibility that these business units they are not only focused on exploitation but also a bit on exploration like the immediate stress organization so that they can take a bit of chance to take the risk on these projects and not only focusing on the short term results that's exactly right any company that wants to grow and sustain themselves over time has to be it has to do a good job of exploitation but has to do more than that they also have to do some exploration as well and even if you're working with external companies like startups you still have to have processes in your own company to be able to receive this work to absorb it to work with it and then to change your internal processes and so what you were describing is ambidexterity is a term in the management literature now for this process of how do we execute the current business but explore and grow a new business at the same time other challenges are there now that we are facing in the energy industry is innovation in business models suddenly they have realized that technology is not the only thing that exists in the world and that sometimes they need to resort to innovate on business models and it's very interesting because your second book you you give me great from the open innovation compact rata g2 something even more deeper because it was open piece a business innovation business models so it's not only innovation strategy but it is the whole concept of the company so what is really an open business model so in the first book of open innovation I was showing with companies like Xerox that they had a hard time when new technologies came out of their laboratories if those did not fit the Xerox business model they did not know what to do with them and they had many of these false negatives we talked about where they had to find a different business model to become valuable in the second book I said what if you could innovate the business model as well as the technology and have a more open business model this might have solved some of the problems I saw at Xerox so an open business model that the processes of value creation and value capture are themselves open and are often shared with external parties so a quick example that will be familiar to many people watching this interview would be either the Google Play or Apple App Store where Google and Apple maintain these stores and you can get all your apps from these stores and buy them on Google Play or on Apple iOS and when you buy them most of the money goes to the app maker but some of the money goes to Apple or to Google and by opening up their store this way Google and Apple do two things one is they create a market for all these application providers that would be very difficult for the application providers to do on their own the second thing they do is they make their own solution much more valuable to their customers because we as phone users use our phones for lots of different purposes and Google and Apple don't have to think about which are the best ones they can create a market and we as consumers can just make our choices and the market helps decide what are the valuable things so these are examples of platforms that create value creation and value capture in a much more open and distributed way in energy we're starting to see smart grids we're starting to see smart power meters and two-way movement of current both to the house but also back to the grid and the possibility now of dynamic pricing engaging and collaborating with consumers not just as users of energy but potentially is also producers of energy so again I think some of these platform approaches are going to be very valuable in the energy sector as well yes indeed I think that the energy sector can learn a lot about what other companies other sectors have been doing and when I was coming back to the book you gave me some time ago the open service innovation I was very happy because one of the trends today in the energy sector is energy as a service yes and that is a secretary what what went one of the conclusions that they were some years ago so I thought oh I mean I think that that that would be really really valuable I mean that the energy industry could see what other industries have been doing because indeed it is not so different on that sense so what do you think about now turning energy and energy as a service so in the company NL I described to you a few minutes ago I had the opportunity to spend some time with their CEO Francesco Sorachi and he said something to me about energy as a service that just amazed me once he said it I could see it very clearly but I had never thought of it until he told me in California where I live electric vehicles are very popular we have Tesla but also the Chevy Volt and now the Chevy bolt and some other all-electric vehicles from Nissan and so forth what's taraji told me was with a smart grid in two-way charging and electric vehicles that utilities like NL could not only deliver and charge your vehicle but they could also rent back energy from your vehicle when you're not using it so that the electric vehicles become distributed mobile energy storage in addition to providing transportation and so NL can actually offer you lots of money during the day when your maybe your car's in a garage they can buy back the energy from your vehicle during the middle of the day when energy use is high but you're at the office and then in the end of the day when you need to go home they give you back the energy and you drive home so for us as car owners our cars are not only transportation but they can act we can also be energy providers so this to me was just a May to have a utility executive explain this to me I think that that that's part of the energy transition that the energy sector is trying to do but also politicians and other citizens I would love to have this kind of new systems in place well to me if we can do this it's going to be even more cool than Justin Bieber one last question hurry because you know that in no energy from that from the from the scratch we were really thinking about embed and embed and babe in the concept of open innovation and indeed what we we created was a platform to collaborate and what but it is organized as a company and then we are trying to put together the students the professor's the researchers and the research centers also the starters' des amis and the large industry and and you know the project from this from the start it was first a project then it became a big business plan suddenly we were setting up a company and now we have been running for five years so what do you think about this experiment because indeed I mean it was it was something new we didn't know how it was going to be but but the idea was to create a platform where collaborations could be as smooth as possible so what do you think well as you say you're five years old now you're supporting a hundred and seventy different organizations you've really built an ecosystem and a community of both large organizations and small ones also academics and researchers so to me it's been an exciting experiment to watch and I'm going to get to spend the day with you today learning all the latest developments so I'm very excited about what you're doing and I think our energy future is going to require these kinds of communities and ecosystems it's going to require embracing new technologies lots of experiments some new business models as well so I think it's an exciting time and it's great to see all the progress you've made in the past five years so Henry thanks a lot for this wonderful interview I have learned a lot I hope that you had also a great time here with us Elena it's a great pleasure I'm so proud of all the success that you and your team are building here and I think it's an exciting time to be working on open innovation in the energy sector

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