Chesbrough is Adjunct Professor, Haas School of Business at the University of California, Berkeley, and Executive Director of its Center for Open Innovation. His landmark book Open Innovation: The New Imperative for Creating and Profiting from Technology (2003) articulated a new paradigm for industrial research and development. His more recent book, Open Business Models: How to Thrive in the New Innovation Landscape (2006), carries the open approach a step further, arguing that business models themselves need to become more open. Innovating business models requires open technology strategies, but also new approaches to managing intellectual property as well. His most recent book, Open Services Innovation: Open Services Innovation: Rethinking Your Business to Grow and Compete in a New Era (2011) explores innovation in a services context. He earned a BA degree in economics from Yale University, an MBA degree from Stanford University, and a PhD degree in business administration from UC Berkeley.
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Morris: Before discussing your latest book, Open Services Innovation, a few general questions. A great deal has happened in the global business world since our last conversation three years ago. In your opinion, which change during that recent period is the most significant and why do you think so?
Chesbrough: In the past three years, there has developed a short-term crisis in both the EU and the US, as each region wrestles with serious issues that are somewhat different. But these issues have had a dampening effect on innovation in both regions, as companies manage through a turbulent and uncertain environment. There is an unfortunate tendency to treat innovation as a luxury good, something to welcome in good times, but cut back on in tough times.
Meanwhile, there is a longer term and to my mind even more important trend, which is the rise of the “emerged markets”. China, India and Brazil of course, but also Turkey, Latin American, South Africa, places that many innovation scholars gave little attention to in the past. There is no question that in this rebalanced world innovation is going to become a global phenomenon to manage and to study.
Morris: As I survey the ever-increasing number of new technologies that appear, I am reminded of Goethe’s poem Der Zauberlehrling (The Sorcerer’s Apprentice) written in 1797. Do you share my concern that at least a few of the new disruptive technologies have taken on a life of their own?
Chesbrough: The statistic that blew me away the most was one I read on Henry Blodget’s Business Insider website. It showed that people are spending fully half of their online time on the Net on Facebook, and the other half on everything else there is on the Web. I don’t know if that’s true, but if so it is truly mind-blowing. I know that it is not true of me or my wife, and that it is true of both of my daughters. I don’t know what a world built around Facebook will look like in the future. It makes me feel like I am on my way to becoming obsolete.
Morris: Howard Gardner’s extensive research on multiple intelligences suggests this next question: Can an “open” mindset be developed? If so, how?
Chesbrough: Yes I believe it can be developed. While this is not an area that I have studied rigorously, I know from my own life experience that at the root of whatever open mindset I have is a basic humility that recognizes my own limitations and numerous areas of ignorance. Being open for me means not being paralyzed by those shortcomings, but using my realization of them as a spur to learn and to grow. When I must function as an expert, ironically that often blocks my own growth. When I get to ask questions, wonder why something is happening or how it works, I can feel myself being stretched ever so slightly in new directions. Happily, being a teacher and having children both force me into stretching myself with some frequency!
Morris: In The Opposable Mind, Roger Martin has much of value to say about integrative thinking. As he explains, it is ”the predisposition and the capacity to hold two [or more] diametrically opposed ideas” in one’s head at the same time and then “without panicking or simply settling for one alternative or the other,” be able to ”produce a synthesis that is superior to either opposing idea.” Integrative thinking requires a “discipline of consideration and synthesis [that] is the hallmark of exceptional businesses and those who lead them.” This seems to describe the open mindset you have endorsed for years. Am I correct?
Chesbrough: Yes, you are. I define open innovation to be a process whereby companies utilize external knowledge more extensively in their own innovation processes, and allow others to utilize the unused ideas they have outside. Open innovation thinking is an “and”, not an “or”. It is NOT an argument that calls for outsourcing all of one’s R&D. Rather, it is a call to integrate internal and external in the integrative manner that Martin articulates.
Morris: What seem to be the most common – and troublesome – misconceptions about open innovation and open business models?
Chesbrough: Many conflate open innovation with open source software, or open source development methodologies. While both concepts share an appreciation for open, participatory engagement of many people in the innovation process, open innovation explicitly incorporates the business model as a core part of the innovation process. Many adherents in open source explicitly eschew business models as irrelevant or even evil. Yet many observers of open source software itself would acknowledge that many businesses have built “open source business models” that helped them achieve greater impact and scale than they otherwise would have done. To me, this is both a good thing (it is good that these open source tools and products have expanded greatly) and a statement of how the world works. It also raises the possibility that adherents of open source sometimes overlook, that some business models could pervert the good intentions of open source and harness all that community contribution for nefarious purposes. This was a concern when Microsoft tried to fork Java some years back by offering a version that only ran on Windows. Oracle seems to be testing the waters lately with Java as they file suits against Google and others who utilize open source.
Morris: What, in fact, is true?
Chesbrough: Some of the most successful open source projects these days are led by large companies, who are investing significant time and effort into the open source projects because it directly or indirectly benefits their own business models (not because they have become altruistic). Contributors and volunteers need to pay attention to who is driving the agenda for these projects, so that they remain aware of how their hard work is being used in the world.
Morris: Now please shift your attention to Open Services Innovation. When and why did you decide to write it?
Chesbrough: Well, I focused my previous books on innovating new products and new technologies. But I often got questions about “what do I do if I am a service firm”? I realized that we know a lot about how to innovate new products, new processes, and new technologies, but know far less about how to innovate in services. Yet this is the majority of economic activity for most OECD countries. So there was a gap to fill. And there is good academic work going on in services innovation research, but little of that has been translated to a general audience. That is part of what I tried to do in Open Services Innovation.
What gives this topic special importance is the rise of China and other emerging economies, those that are now innovating as well as manufacturing the innovations of others. There is a risk of a commodity trap, where firms that focus exclusively on developing better products and technologies run the real risk of failing to differentiate their offerings sufficiently, and instead become commoditized by innovative entrants from the emerging parts of the world.
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To read the complete interview, please click here.
Henry Chesbrough invites you to check out the wealth of resources at these websites
Here is an excerpt from another outstanding article, written by Richard Rumelt and featured by The McKinsey Quarterly online. To read the complete article, please click here.
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Bad strategy abounds, says UCLA management professor Richard Rumelt. Senior executives who can spot it stand a much better chance of creating good strategies.
Horatio Nelson had a problem. The British admiral’s fleet was outnumbered at Trafalgar by an armada of French and Spanish ships that Napoleon had ordered to disrupt Britain’s commerce and prepare for a cross-channel invasion. The prevailing tactics in 1805 were for the two opposing fleets to stay in line, firing broadsides at each other. But Nelson had a strategic insight into how to deal with being outnumbered. He broke the British fleet into two columns and drove them at the Franco-Spanish fleet, hitting its line perpendicularly. The lead British ships took a great risk, but Nelson judged that the less-trained Franco-Spanish gunners would not be able to compensate for the heavy swell that day and that the enemy fleet, with its coherence lost, would be no match for the more experienced British captains and gunners in the ensuing melee. He was proved right: the French and Spanish lost 22 ships, two-thirds of their fleet. The British lost none. [Nelson himself was mortally wounded at Trafalgar, becoming, in death, Britain’s greatest naval hero. The battle ensured Britain’s naval dominance, which remained secure for a century and a half.]
Nelson’s victory is a classic example of good strategy, which almost always looks this simple and obvious in retrospect. It does not pop out of some strategic-management tool, matrix, triangle, or fill-in-the-blanks scheme. Instead, a talented leader has identified the one or two critical issues in a situation—the pivot points that can multiply the effectiveness of effort—and then focused and concentrated action and resources on them. A good strategy does more than urge us forward toward a goal or vision; it honestly acknowledges the challenges we face and provides an approach to overcoming them.
Too many organizational leaders say they have a strategy when they do not. Instead, they espouse what I call “bad strategy.” Bad strategy ignores the power of choice and focus, trying instead to accommodate a multitude of conflicting demands and interests. Like a quarterback whose only advice to his teammates is “let’s win,” bad strategy covers up its failure to guide by embracing the language of broad goals, ambition, vision, and values. Each of these elements is, of course, an important part of human life. But, by themselves, they are not substitutes for the hard work of strategy.
In this article, I try to lay out the attributes of bad strategy and explain why it is so prevalent. Make no mistake: the creeping spread of bad strategy affects us all. Heavy with goals and slogans, governments have become less and less able to solve problems. Corporate boards sign off on strategic plans that are little more than wishful thinking. The US education system is rich with targets and standards but poor at comprehending and countering the sources of underperformance. The only remedy is for us to demand more from those who lead. More than charisma and vision, we must demand good strategy.
The hallmarks of bad strategy
I coined the term bad strategy in 2007 at a Washington, DC, seminar on national-security strategy. My role was to provide a business and corporate-strategy perspective. The participants expected, I think, that my remarks would detail the seriousness and growing competence with which business strategy was created. Using words and slides, I told the group that many businesses did have powerful, effective strategies. But in my personal experiences with corporate practice, I saw a growing profusion of bad strategy.
In the years since that seminar, I have had the opportunity to discuss the bad-strategy concept with a number of senior executives. In the process, I have condensed my list of its key hallmarks to four points: the failure to face the challenge, mistaking goals for strategy, bad strategic objectives, and fluff.
[Here is Rumelt’s discussion of the first. To read the complete article, please click here.]
Failure to face the problem
A strategy is a way through a difficulty, an approach to overcoming an obstacle, a response to a challenge. If the challenge is not defined, it is difficult or impossible to assess the quality of the strategy. And, if you cannot assess that, you cannot reject a bad strategy or improve a good one.
International Harvester learned about this element of bad strategy the hard way. In July 1979, the company’s strategic and financial planners produced a thick sheaf of paper titled “Corporate Strategic Plan: International Harvester.” It was an amalgam of five separate strategic plans, each created by one of the operating divisions.
The strategic plan did not lack for texture and detail. Looking, for example, within the agricultural-equipment group—International Harvester’s core, dating back to the McCormick reaper, which was a foundation of the company—there is information and discussion about each segment. The overall intent was to strengthen the dealer/distributor network and to reduce manufacturing costs. Market share in agricultural equipment was also projected to increase, from 16 percent to 20 percent.
That was typical of the overall strategy, which was to increase the company’s share in each market, cut costs in each business, and thereby ramp up revenue and profit. A summary graph, showing past and forecast profit, forms an almost perfect hockey stick, with an immediate recovery from decline followed by a steady rise.
The problem with all this was that the plan didn’t even mention Harvester’s grossly inefficient production facilities, especially in its agricultural-equipment business, or the fact that Harvester had the worst labor relations in US industry. As a result, the company’s profit margin had been about one-half of its competitors’ for a long time. As a corporation, International Harvester’s main problem was its inefficient work organization—a problem that would not be solved by investing in new equipment or pressing managers to increase market share.
By cutting administrative overhead, Harvester boosted reported profits for a year or two. But following a disastrous six-month strike, the company quickly began to collapse. It sold off various businesses—including its agricultural-equipment business, to Tenneco. The truck division, renamed Navistar, is today a leading maker of heavy trucks and engines.
To summarize: if you fail to identify and analyze the obstacles, you don’t have a strategy. Instead, you have a stretch goal or a budget or a list of things you wish would happen.
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To read the complete article, please click here.
Richard Rumelt is the Harry and Elsa Kunin Professor of Business and Society at the UCLA Anderson School of Management. This article is adapted from his forthcoming book, Good Strategy/Bad Strategy: The Difference and Why It Matters (Crown Publishing, July 2011). You may visit his blog at strategyland.com.