EXHIBIT MC9.3Economic Benefits of an Open-lnnovation ModelSouroe: Adapond tron H. Chesbrough G00n "Wy companies should hove open business modeia," MIT Slo Managanant Reine Weter: 22-2The Economic Pressure on Closod InnovationThe New Business Model of Open InnovationNuw Revenues tromSales, SpinoftsLicanses, and OtharExternatSharter Product Lifain the MarketOppartunitiesREVENUESREVENUESRevanunurnat DeveloponentIntornal Development CostsCost Savngs tomLaveraging ExternalDevelopawntClosed BusinessModel (AfterTo offset rising development costs and shorter productlife cycles, companies are experimenting with creativeways to open their business models, use extemal ideasand technologies in internal product development, andallow internal intellectual property to be commercializedCOSTSCOSTSfising Cnstsof lonovationClosed BusinessModel (BeforelAs product life cycles become shorter and as developmentcosts risa, the net result is that innovative companies erefinding it harder to justify their investment in new products.Closed BusinessModel (Ater)Closed BusinessModel (Before)extenally.Discussion Questions:1. Weigh the benefits and costs of closed innovation versus open innovation. What conclusionsdo you draw?2. What are some of the risks of an open-innovation strategy that a company should considerbefore embarking on it?3. Apply the resource-based view of the firm. Do you believe P&G's Connect+Develop (C+D)open-innovation system has the potential to create a competitive advantage for the firm? If youbelieve that C+D does have the potential to create a competitive advantage, do you believe itis sustainable? Why or why not?4. Do you agree with the statement by Larry Huston and Habil Sakkab, executives at P&G, that"Connect+Develop will become the dominant innovation model in the 21st century"? Why orwhy not? What would its dominance do to C+D's potential to create a competitive edge for afirm?5. Identify some of the major obstacles a manager would encounter attempting this kind oforganizational change. What recommendations would you make on how to accomplish suchlarge-scale organizational change successfully? 380 MINICASE 9 PaG's New Corporate Strategy: "Connect+Develop"MINICASE 9P&G's New Corporate Strategy: "Connect+Develop"EXHIBIT MС9.2Contrasting Principles of Closed and Open InnovationClosed-Innovation PrinciplesOpen-Innovation PrinciplesTogether, these factors now force even the larg-est companies, such as AT&T, IBM, GE, and Sony,to shift their innovation strategy toward a model thatblends internal with external knowledge-sourcing vialicensing agreements, strategic alliances, joint ven-tures, and acquisitions.In the open-innovation model, a company attemptsto commercialize both its own ideas and research fromother firms. It also finds external alternatives suchas spin-out ventures or strategic alliances to com-mercialize its internally developed R&D. As ExhibitMC9.1 shows, the boundary of the firm has becomeporous (as represented by the dashed line in theright panel), allowing the firm to spin out some R&Dprojects while "sourcing in" (developing in-house)other promising projects. Exhibit MC9.2 (next page)compares and contrasts open-innovation and closed-innovation principles.DURING MOST OF the 20th century, the closed-innovation approach was the dominant research anddevelopment (R&D) strategy for most leading indus-trial corporations: They tended to discover, develop,and commercialize new products internally. Althoughthis approach was costly, it allowed firms to capturethe returns to innovation.The smart people in aur field work for us.Not all the smart people work for us. We need to work withsmart people inside and outside our company.To profit from R&D, we must discover it,develop it, and ship it ourselves.Extemal R&D can create significant value; internal R&D isneeded to claim (absorb) some portion of that value.If we discover it ourselves, we will get it to market first.We don't have to originate the research to profit from it;we can still be first if we successfully commercialize newresearch.Several factors led to a shift in the knowledge land-scape from closed innovation to open innovation. Theyinclude:The company that gets an innovation tomarket first will win.Building a better business model is often more important thangetting to market first.1 The increasing supply and mobility of skilledworkersa The exponential growth of venture capital- The increasing availability of extemal options(such as spinning out new ventures) to commer-cialize ideas that were previously shelveda The increasing capability of external suppliersIf we create the most and best ideas in the industry, wewill win.If we make the best use of internal and external ideas, wewill win.We should control our intellectual property(IP), so that our competitors don't profit fromit.We should profit from others' use of our IP, and we shouldbuy others' IP whenever it advances our own businessmodel.Source: Adapted from H. W. Chesbrough (2003I, Opan ianovation: The New imperative for Creating and Profiing trom Technology (Bestan: Harvard BusinessSchool Press).EXHIBIT MC9.1An example of open innovation is Procter &Gamble's "Connect+Develop," or, C+D (a play onresearch and development, or R&D). Due to thematuring of its products and markets, P&G was forcedto look outside for new ideas. P&G is an $80 billioncompany whose investors expect it to grow 4-6 percenta year; which implies generating between $3 and $5billion in incremental revenue annually. P&G was nolonger able to generate this amount of growth throughclosed innovation. By 2000, P&G's closed-innovationmachine had stalled, and the company lost half itsmarket value. It needed a change in innovation strat-egy to drive organic growth.P&G's Connect+Develop is a web-based interfacethat connects the company's internal-innovation capa-bility with the distributed knowledge in the globalcommunity. From that external community, research-ers, entrepreneurs, and consumers can submit ideasthat might solve some of P&G's toughest innovationchallenges. The C+D model is based on the realizationthat innovation was increasingly coming from smallentrepreneurial ventures and even from individuals.Universities also became much more proactive incommercializing their inventions. The Internet nowenables access to widely distributed knowledge fromaround the globe.External collaborations fostered through the world-wide Connect+Develop network now play a role inroughly 50 percent of P&G's new products, up fromabout 15 percent in 2000. P&G's innovation produc-tivity has increased, and its innovation costs havefallen. The economic benefits to an open-innovationstrategy are captured in Exhibit MC9.3. Successfulproduct innovations that resulted from P&G's open-innovation model include "Pringles meets Print" (soldfor $1.5bn to Diamond Foods in 2011), Mr. CleanMagic Eraser, Swiffer Dusters, Crest SpinBrush, andOlay Regenerist.Closed Innovation vs. Open InnovationSource: Adapted from: H. Chasbrough (200S1, "The ares of open innovation," MIT Sloan Managemant Review, Spring: 35-41.Boundary ofthe FirmBoundary ofthe FirmNewMarketResearchProjectsResearchProjectsCurrentMarketThe MarketResearchDevelopmentResearch-Development

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Economic Benefits of an Open-Innovatlon Madel Saure Adad to Deg n Wy ureaies houlhe pe sine deMT Saaganat ei Wee 2-a The Economic Presure on Closed Innovation The New Busines Model of Open Innovation New Revenues trom Sales. Spine Licensen and Oher Eternal Opportunties Sharter Product i in the Market REVENUES REVENUES t Cost Internal Development Costs COSTS Cest Sags Ivenging Etena Devekpt Closed Business Model Ater COSTS Roing Costa of Inovation Cosed Business Model (Before) Closed Business Model (Beforel As product ife cycles become shorter and as development costs risa, the net result is that innovative companies are finding it harder to justify their investment in new products. Closed Business Model (Aher) To offset rising devalopment costs and shorter produ life cycles, companies are experimenting with creati ways to open their business models, use temal ida achoeioales in intenal product development, a

Economic Benefits of an Open-Innovatlon Madel Saure Adad to Deg n Wy ureaies houlhe pe sine deMT Saaganat ei Wee 2-a The Economic Presure on Closed Innovation The New Busines Model of Open Innovation New Revenues trom Sales. Spine Licensen and Oher Eternal Opportunties Sharter Product i in the Market REVENUES REVENUES t Cost Internal Development Costs COSTS Cest Sags Ivenging Etena Devekpt Closed Business Model Ater COSTS Roing Costa of Inovation Cosed Business Model (Before) Closed Business Model (Beforel As product ife cycles become shorter and as development costs risa, the net result is that innovative companies are finding it harder to justify their investment in new products. Closed Business Model (Aher) To offset rising devalopment costs and shorter produ life cycles, companies are experimenting with creati ways to open their business models, use temal ida achoeioales in intenal product development, a

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