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On this detailed illustration concerning john wolpert, entrepreneur in residence at ibm.
Open Innovation: The Response
of Japanese Firms
Report to NEDO
Henry Chesbrough, Principal Investigator
Meyer Family Fellow
Haas School of Business
UC Berkeley
Table of Contents
I. Acknowledgements
II. Executive Summary
III. Open Innovation – definition, principles, impact
IV. JSVIF Company Presentations and Panelist Feedback
V. Open Session Presentations and Discussion
VI. Concluding Observations
VII. Appendices
A. List of attending participants and firms
B. Agenda and Notes from September 28, 2012 meeting
C. Agenda and Notes from December 14, 2012 meeting
D. Agenda and Notes from February 15, 2013 meeting
E. Agenda and Notes from November 1, 2013 meeting
I. Acknowledgements
This report which was financed and commissioned by the Silicon Valley Office of the New Energy and
Industrial Technology Development Organization (NEDO), reflects the efforts of a number of people who
were necessary to its realization. The initiative for this project came from Mr. Osamu Onodera and then
continued by Go Takizawa of NEDO, who also provided critical oversight and feedback throughout the
project. Mr. Toshiro Okada of JETRO and Mr. Tomotaka Kuwahara of the Consulate General’s office in
San Francisco provided input and supplementary organizational support. Critical organizational support
throughout the project came from Ms. Aya Iwasuji of NEDO.
Additional thanks are due to the more than 30 people from Japanese companies operating in the US
who participated in one or more of our meetings, and also provided additional feedback in other, more
casual settings. They are listed in the first appendix (Appendix A) to this report. I sincerely hope that
this report will be useful to each of them, as they strive to manage their innovation challenges.
Finally, thanks to Yu Jin Kim, a promising PhD student at the Haas School of Business at UC Berkeley, for
taking notes of each of the meetings, and contributing her perspective of effective Korean innovation
management practices as well.
II. Executive Summary
Japanese companies were global innovation leaders in numerous industries in the 1980s and 1990s.
From electronics to automobiles to shipbuilding to consumer products, the rest of the world stood in
awe over the achievements of companies such as Matsushita, Toyota, Mitsubishi, and Sony. While
some companies such as Toyota remain at the cutting edge and most Japanese companies’
technological capabilities remain strong, more recently the comparative position of Japanese companies
in global innovation has been eroded in a number of industries, especially consumer electronics. One
possible reason for this is the growth of open innovation around the world in the past ten to twenty
years, and the slow response of Japanese firms to the opportunities offered by open innovation. A
second reason may be that Japanese firms, while remaining strong in technology, have not been able to
lead the development of new business models.
In this report, we present an overview of open innovation, along with responses to open innovation
presented by executives from leading Japanese companies. We then introduce the concept of business
model innovation, and discuss its importance to the revitalization of Japanese businesses. These
discussions were led by UC Berkeley professor Henry Chesbrough, who is credited with originating the
term open innovation, and whose more recent work has emphasized innovation in business models and
in services.
It appears that open innovation is becoming better known among leading Japanese firms. To date,
however, its primary implementation has been in the US market, and secondarily to other markets
outside Japan. Open innovation must first prove its ability to generate more revenue and more profit in
these peripheral markets, before Japanese companies will choose to adopt it for their core market in
Japan.
III. Open Innovation: Definition, Principles, Impact
The open innovation paradigm can be understood as the antithesis of the traditional vertical integration
model where internal innovation activities lead to internally developed products and services that are
then distributed by the firm. I term the vertically integrated model a Closed Innovation model. Put into
a single sentence, open innovation is the use of purposive inflows and outflows of knowledge to
accelerate internal innovation, and expand the markets for external use of innovation, respectively.
1
Open Innovation has become a new paradigm for organizing innovation. It assumes that firms can and
should use external ideas as well as internal ideas, and internal and external paths to market, as they
look to advance their innovations. Open Innovation processes combine internal and external ideas
together into platforms, architectures and systems. Open Innovation processes utilize business models
to define the requirements for these architectures and systems. The business model utilizes both
external and internal ideas to create value, while defining internal mechanisms to claim some portion of
that value.
It is helpful to visualize this transformation via “before” and “after” diagrams of an innovation process
(see Figures 1 and 2 below).
Figure 1 shows a representation of the innovation process under the previous Closed model of
innovation. Here, research projects are launched from the science and technology base of the firm.
They progress through the process, and some of the projects are stopped, while others are selected for
1
See H. Chesbrough, W. Vanhaverbeke and J. West, Open Innovation: Researching a New Paradigm, Oxford
University Press, 2006, p.1.
© 2004 Henry Chesbrough 2
The Current Paradigm: A Closed
Innovation System
Research Research
Investigations Investigations
Development Development New Products New Products
/Services /Services
The
Market
Science
&
Technology
Base
R D
further work. A subset of these are chosen to go through to the market. This process is termed a
“closed” process because projects can only enter in one way, at the beginning, and can only exit in one
way, by going into the market. AT&T’s Bell Laboratories stands as an exemplar of this model, with many
notable research achievements, but a notoriously inwardly focused culture. Other celebrated 20
th
century examples of this model include IBM’s TJ Watson Research Center, Xerox PARC, GE’s
Schenectady laboratories, Merck, and Microsoft Research. (It is worth noting that each of these storied
institutions has greatly altered its innovation model in the past decade.) In other countries such as
Japan, the Closed model remains quite popular to this day.
Figure 2 shows a representation of the Open Innovation model. Here, projects can be launched from
either internal or external technology sources, and new technology can enter into the process at various
stages, the Outside-In portion of the model. In addition, projects can go to market in many ways as well,
such as through outlicensing or a spin-off venture company, in addition to going to market through the
company’s own marketing and sales channels. This is the Inside-Out part of the model. I labeled this
model “open” because there are many ways for ideas to flow into the process, and many ways for it to
flow out into the market. IBM, Intel, Philips, Unilever, and Procter & Gamble all exemplify aspects of
this open innovation model.
The concept of open innovation has made a significant impact, both in academia and in industry
practice. There are more than 6,700 citations over the past 10 years to the book Open Innovation from
academic scholars, according to Google Scholar. A recent survey conducted by the Fraunhofer Institute
in Germany for the Center for Open Innovation at UC Berkeley’s Haas Business School found that 78% of
© 2004 Henry Chesbrough 5
Current
Market
Internal
Technology
Base
R D
The Open Innovation Paradigm
Technology
Inlicensing
New
Market
Technology Spin-outs
External
Technology
Base
Other Firm’s
Market
CVC
Investing
Product/Business
Acquisition
Licensing
companies with sales of more than US$250 million in the US and Europe were utilizing open innovation.
A survey is under development in Japan to assess the prevalence of open innovation there as well.
Preliminary indications suggest that the prevalence is far lower at the present time.
What are the reasons for the growing interest in and use of open innovation shown above? One factor
is the shift in the mix of companies performing R&D activities. The table below from the National
Science Foundation shows a remarkable shift in R&D. In 1981, companies of more than 25,000
employees accounted for more than 70% of all R&D spending. In that same year, companies of fewer
than 1,000 employees accounted for less than 5% of spending. By 2007, the largest firms’ share of R&D
spending fell to 35%, while the share of R&D spending from the smallest firms grew to 24%. Even the
largest, most effective companies cannot afford to ignore the wealth of external R&D outside their own
four walls in today’s environment.
Table 1 – Share of R&D spending by Company Size, selected years
These shifts imply a new set of principles for effective R&D management, as shown in the table below.
Table 2 – Contrasting Principles of Closed and Open Innovation
Closed Innovation Principles Open Innovation Principles
The smart people in our field work for us “Not all of the smart people work for us.”
We need to work with smart people inside
and outside our company.
To profit from R&D, we must discover it,
develop it, and ship it ourselves
External R&D can create significant value;
internal R&D is needed to claim 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 in
order to profit from it.
The company who gets an innovation to
market first, will win.
Building a better business model is better
than getting to market first
If you create the most, and the best ideas
in the industry, you will win
If you make the best use of internal and
external ideas, you will win
We should control our IP, so that our
competitors don’t profit from our ideas
We should profit from others’ use of our
IP, and we should buy others’ IP whenever
it advances our own business model.
Working with Venture Capital: Presentations to the Nov. 1
st
Meeting
Japanese firms have their own sources of dynamism, though these differ in many ways from the Silicon
Valley model. While venture capital does exist in Japan, its size is significantly smaller than it is in the
US. Much of the investment that does occur arises at later stages of a company’s growth (often termed
“mezzanine financing”). Moreover, the sources of capital for Japanese venture capital are frequently
intertwined with the main banking system that supports the leading industrial firms in Japan. These
sources are unwilling to support startup activity that threatens to disrupt the businesses of the large
businesses that provide the bulk of their capital. This is in sharp contrast to the US venture capital
system. There, the limited partner/general partner model sharply separates the sources of capital from
the investment decisions made with that capital.
Instead, many Japanese companies pursue new innovation opportunities either through their existing
businesses (for sustaining technologies that fit with existing business models) or through spin-off
companies for more disruptive technologies. This hiving-off process is far more developed in Japan than
it is in the US. A simple example would be the history of one of the JSVIF members, Fujitsu. Fuijitsu was
spun off from Fuji Electric in 1937. Fuji Electric was itself formed in 1923 as a joint venture between the
Furukawa Group and Siemens. As Fujitsu grew, it later spun off Fanuc to focus that organization on
automotive automation technologies. Today, Fujitsu exists as a group of companies that target different
markets. A second example would be the Matsushita group companies. A number of these companies
trade as independent stocks on the Nikkei stock exchange.
This combination of affiliated companies with independent stock listings provides coordination, but also
autonomy in pursuing new innovation opportunities. It is quite possible that open innovation may
thrive more readily in these more autonomous organizational entities, than in the core business of the
parent firm. Alternatively, Japanese companies could experiment with open innovation in these
affiliated entities first, as they decide whether and how to apply open innovation in their core business
areas.
KDDI
KDDI presented its recent experience with Silicon Valley companies. It reported some good successes.
It has partnered successfully with some startup companies in silicon valley, including fuhu, Moxtra, and
localmind. It has deployed some of its visualization technologies from its R&D organization in the social
media market in the US. And it has accelerated its internal R&D activities by partnering with PARC and
Mozilla.
KDDI described its future as blending open innovation with business development. In the US market this
should be quite promising. So far, it appears that KDDI is emphasizing open innovation in its strategy for
the US market. There seems to be less use of it in its home market of Japan. It remains to be seen if
open innovation will also prove to be a useful tool there as well.
Meidensha
Meidensha outlined a similar picture. It experimented with joint ventures back in 1998, taking a 51%
share and leaving 49% with the JV partner. Then in 2002, it came to Silicon Valley with a program of
corporate venture capital investment. However, these initiatives were closed down during the financial
crisis of 2008 The company is today employing a network of strategic alliances with partners that is
more capital efficient and adaptive than the earlier initiatives. These alliances began in areas close to
the core business, but are now expanding to new technologies and new markets. Working with startup
companies has been an important way for Meidensha to enter into these new technology and market
areas in the US market. Like KDDI, open innovation appears to be a strategy for Meidensha to grow its
US market presence. It is not yet a tool for increasing its sales in its Japanese market.
Konica-Minolta
Konica-Minolta was quite honest about its experience with open innovation to date. The company has
worked closely with universities on at least 5 different projects. Two of these projects have now spun
out of the university into new startup companies. This is an interesting combination of spin-off and
startup that was discussed above. However, the time scale needed for these projects is long, and it is
different to foresee the market needs and opportunities. There remains a large gap between a viable
technology and a viable, scalable business. These activities also appear to be focused within the US, and
do not seem to be employed to much effect in Japan to date.
Panasonic
Panasonic also shared its experience in Silicon Valley. It too struggles with long time scales, but has had
some success in both joint development agreements with startup companies and with later acquisition
of startups they initially partnered with. Panasonic worked closely with a UC Berkeley spin-off company,
SiBeam, on a joint development project. This was successful, causing the company to place the
technology into some of its high-end television consoles. Panasonic also worked successfully with a UK
startup company, Elixent, on a project to create a new image codec format for broadcasting. Panasonic
then chose to acquire the company, due to the strong fit between the technology and Panasonic’s
strategic objectives. They also reported that there are significant challenges to manage in collaborating
with these methods. There are enormous cultural differences to manage. There are many
communications problems to sort out. It is critical to sort out company confidential information, to
make sure that such information remains within the firm. And it is critical to craft win-win joint
development agreements (JDAs), if the collaboration is to sustain itself over time. Panasonic’s open
innovation efforts clearly extend beyond the US to Europe as well, in contrast to the other presentations
in this session.
In the ensuing discussion, a number of interesting points were made:
Shun Aramaki, Director of Presidio Ventures, a corporate VC arm of Sumitomo Corporation gave his
insights on working with VCs and startups and noted that it was always a challenge to align the
expectation of timeframes between VCs and startups on the one hand and Headquarters (i.e. a large
Japanese company) on the other. This perspective was echoed by other panelists as well, and is typical
not only of Japanese companies, but large companies in the US as well.
Kevin Skillern, recently employed by GE Venture Capital, discussed the opportunities and challenges of
corporate venture capital. He explained how GE used connections with the VC community to identify
new investment opportunities, and the GE ecomagination experiment that led to the formation of 23
new startup venture firms in green and renewable energy. While GE’s energy business is quite large
(roughly US$40 billion annually in revenue), most of its work is in large-scale power generation, not
these emerging areas. The purpose of this initiative was to deepen GE’s exposure to novel, green and
clean-tech technologies and ventures in the energy market.
Jim Spohrer, Director of IBM University Programs Worldwide, discussed the IBM model of sharing
knowledge and technology with startup firms, but not investing in them directly. Since IBM made many
sales alongside the sales of startup firms’ products, IBM was a powerful sales partner for many startups
looking to grow their business. This allowed IBM to align itself quite rapidly with promising startups,
since their own revenues benefited directly from the success of these startups. In turn, working with
IBM brought greater credibility to these young startups, and helped them get business with large
companies, who liked buying from IBM.
Brad McManus, former director of corporate venture investing for Panasonic, discussed the challenges
of coordinating VC processes with typical Japanese corporate planning processes. He explained that, as
Shun Aramaki noted above, there is a need for faster decision-making in Japanese firms, along with
greater delegation of decision authority for small-sized investments. He is establishing a new venture
fund with a select number of limited partners who have similar strategic interests. But his firm will act
as the general partner, enabling them to make fast decisions of whether and when to invest in particular
promising new ventures.
John Wolpert, Entrepreneur in Residence at IBM, discussed his experience with working in startups, and
creating new businesses inside large corporations. Each had its advantages, but entrepreneurial
initiative is required in both settings in order to achieve a new, successful business. He pointed out that
these internal entrepreneurial roles do not always offer secure long-term employment with the firm,
owing to the higher level of risk involved.
1. Measuring the ROI for Japanese companies of working with startups
It is an established practice of most large companies (not only large Japanese companies) to carefully
measure the ROI of innovation investments. Yet our discussion concluded that this approach may be
misguided when working with startup firms. Because the firms are quite young and quite small, there is
very little quantitative information available to evaluate their activities. Striving for too much detailed
information on potential markets and too much time invested in gathering information could often lead
to the collaboration opportunity to be lost, as startups do not have the time or the resources to gather
such information or to wait for a long decision making process. Striving for more concrete information
and data, , corporate evaluations of ROI effectively push companies back into the Red Oceans of
intensely competitive markets, where there are far more data available instead of pursuing Blue Oceans
of new, untapped markets. This defeats the purpose of using startups to explore new markets.
Rather, it may be better to follow the practices of typical VC firms in measuring the performance of
startups, where funding is tied to the achievement of milestone events. A VC typically makes an initial
investment decision by setting a decision date and through a focused discussion. This allows VCs to
avoid losing investment opportunities by taking too much time in the decision making.
It was also noted that the value of the startup resides in the people. Having a good technology and
product are a necessary condition but when considering a buyout, whether the key personnel will
remain is a key factor.
Another way to utilize VCs is to use VC financing for “spin off ventures”. From the point of view of the
company spinning off the venture, it often requires IP to remain in the company and wants to maintain
certain control. As salaries and remuneration is better in the parent company, main technical staffs are
reluctant to go to the spin-off. From the point of view of VCs considering the funding of the spin off, it is
important that 1) IP belongs to the spinoff, 2) the firm does not try to control the spinoff, and 3) key
members who dealt with the technology/product will be working at the spin off.
The bigger opportunity for JSVIF members, though, is to realize that Japanese companies have a lot to
offer VC firms in Silicon Valley. VC firms make their money by exiting their investments through either
an initial public offering (IPO) or an acquisition of the venture by a much larger firm. These days, most
exits are coming from acquisition, not IPOs. Japanese firms are attractive to VC firms because they
could be that acquiring firm. As many of our panelists noted, it is not necessary to invest in VC-funded
startups to work with them. Joint development agreements, letters of intent to be early customers, and
technology sharing agreements can expose Japanese firms to many of the valuable technologies (and
business models, see below) being developed by startup companies. Large companies can be a great
first customer or a collaborator in order for startups to gain credibility. Large companies actually doing
business in various areas have valuable insights that VC partners do not have by virtue of their being in
these businesses. IBM, for example, works with VC firms this way.
2. The Second Session: Business model innovation
Professor Chesbrough pointed out that business model innovation is as valuable as technology
innovation, yet most large firms (including Japanese firms) have well developed processes and budgets
for technology development, but not for business model innovation. Much of the value created by
startup firms in Silicon Valley comes from their willingness to explore alternative business models for
new technologies, not just the technologies themselves. Google, for example, was perhaps the 14
th
search engine developed to search the internet for useful information. Its original business model was
not strong, causing Yahoo to decline the chance to acquire the company for $10 million in 2000. Only
after the AdWords and AdSense keyword auction business model was adopted did Google’s business
take off.
Steve Blank has defined a scalable startup as “a temporary organization searching for a repeatable and
scalable business model”.
2
This makes an important distinction. Most small businesses are created and
operated to remain small. Only a few aspire to become large businesses, and only a few of those
manage to attract the capital, the talent, and the customers needed to become a significant business.
But these few scalable startup successes often pioneer new business models and change the game for
the rest of the industry. Their importance is thus much larger than their numbers alone would indicate.
Recent research from the Kauffman Foundation also shows that the majority of job growth in the past
two decades in the US has come from exactly these kinds of startups.
3
Japanese Experiences with Corporate Business Model Innovation- reports from the Nov. 1
st
meeting
As research on open innovation has progressed, it is becoming clear that innovation must go beyond
products, services and underlying technologies. Business models themselves must be innovated. This is
a daunting challenge, as most companies in the US, Japan, and elsewhere lack any clearly defined
process, resources, organization, or authority to experiment with and deploy alternate business models.
In the afternoon session, this was the topic of three different company presentations from Japanese
firms.
2
Steve Blank and Robert Dorf, The Startup Owners Manual, 2012.
3
Kauffman Foundation, need the cite.
Sumitomo
Sumitomo Electric shared parts of their Vision2017 program. This has three components, all oriented
around growth. New Growth in Current Business Fields involved continued investment in their existing
domains of Eenrgy, ICT, Automotive, Electronics, and Industrial Materials. Expansion into Integrated
Business Fields contemplates new sources of growth from integrating two or more sets of technologies
from their existing domains, such as Environment and Infrastructure. The third area is Challenging New
Business Fields, such as Life Sciences and Resources, that extend beyond the existing technological
capabilities of the company.
To achieve business model innovation, SEI is adding marketing and strategic planning functions to its
R&D group, as shown in the figure above. The existing R&D functions will now house people from the
Sales organization (for new business marketing and promotion) and from Strategic Planning (for
corporate planning). They commenced a process of business model trial and error in the US in 2009,
and chose Silicon Valley as the location for these experiments. The speed of Silicon Valley was a key
reason for this selection. They are now working on how to integrate the learnings from this work with
the SEI headquarters back in Japan.
Obayashi
Obayashi Corporation spoke about the need to extend Open Innovation, so that the end user and
customer were the focus of innovation efforts. (A very similar observation was made in Open Services
Innovation
4
). As a contractor, Obayashi is fundamentally a services provider. Their growth strategies
4
Henry Chesbrough, Open Services Innovation, Jossey-Bass, 2011
include further global expansion (over 80% of sales are from the Japanese market currently), creation of
new enterprises, and development of new technology (see figure below).
In 2012, they established one of these new businesses, the Obayashi Clean energy Corporation, which is
entering the power generation business with green and renewable technologies. A more distant future
business was the Space Elevator, which is currently just an exciting concept.
NTT
NTT spoke next. One of the world’s largest and most technologically advanced companies, NTT is a
household word in Japan, but nearly unknown in the US. The company is moving from a provider to a
“value partner” in its businesses, adding more services to its offerings and placing more focus on the
consumer. The Global Cloud will be the platform for delivering many of these services. They recently
opened a new subsidiary, NTT –i-Cubed, in Silicon Valley to support the growth of NTT’s business outside
Japan.
While this lab is very young, they are already engaged in projects on open-source software and service
visualization, as shown in the figure above. The business model work at NTT i-Cubed, however, remains
at a very early stage of exploration.
Yamato
Yamato Transport discussed its approach to business model innovation, with its Value Networking
Design, as shown in the figure below.
This involves significant process improvements on its already leading delivery capabilities. They are
trying to create processes that involve non-stop movement of parcels, to increase delivery speed for
same day delivery in certain cities. They are working on demand chain (along with supply chain)
management, to provide exactly what is needed when it is needed. They are pioneering next day
delivery in parts of China, and using a cloud platform to deliver these new services. As the final point in
the figure claims, the cloud platform will allow new companies to work with Yamato and not need to
invest in their own warehouses or personnel for these functions.
Hitachi
Hitachi was the last presenting company. Like many of the other companies, it is seeking growth
through a combination of greater innovation in services, more global business expansion, and internal
transformation to become a faster organization. Open innovation will be a process through which the
strong R&D functions of the company engage and co-create innovations with customers and business
partners to solve important business issues. Hitachi is expanding its R&D network, with new
laboratories for Big Data in the US, new materials development in China, new rail research in Europe,
and a very recent lab in Brazil. They are already providing traffic management services in the UK today,
and deploying cloud services at construction worksites to increase equipment utilization, improve
equipment tracking, reduce construction delay and increase worksite productivity. A cloud platform will
be the key delivery mechanism for these services. Hitachi’s presentation was impressive for the global
reach of its innovation initiatives.
Analysis of the Japanese Experiences
Looking across these presentations, a number of points can be observed. One is the growing
importance of the cloud as a backbone for delivering new services and higher value added for
customers. Another is the growing importance of the US, both as a testbed for new business models,
but also as a large, friendly market for Japanese firms to grow. By contrast, the Japanese market is
aging, and growth in that market is likely to be much slower than in the US. A third is the increasing
importance of services, as opposed to products, in the new growth strategies of these firms. This will
put new demands on the Japanese R&D organization, which traditionally is optimized for product
innovation.
A number of JSVIF firms (Ajinomoto, Yamato Transport, Tokyo Gas, Daiwa House, Daikin, Omron,
Sumitomo Electric) made presentations on their experiences with business models either existing or for
new business areas using the business model canvas. Ajinomoto introduced how it is diversifying from
its current seasoning, food and amino acid business into nutritional products/medicine which requires
greater coordination with hospitals and doctors. Yamato Transport has gotten new ideas for business
model innovation from its employees and stated that the flexibility of the services industry may have
some advantages in terms of business model innovation. Starting from a simple parcel delivery service,
Yamato is exploring using the delivery infrastructure to provide repair and maintenance activities for
electronics and other appliances. Daikin explained its existing model of providing 24hr/7 workable air-
conditioning to businesses through its extensive services network which it has expanded successfully to
China and is eying the US market through the acquisition of Goodman.
Yet the discussion of the JSVIF revealed that no companies had established processes to explore and
manage the development of alternative business models for promising new technologies, nor were they
considering the active use of startups or spin-offs to explore alternative business models. This may end
up being one of the primary reasons to engage with Silicon Valley startups and VCs, because business
model innovation is a core part of their entrepreneurial process.
At a deeper level, the reported activities from the participating companies showed that each was
exploring new possibilities for open innovation and for business model innovation, yet no firm had any
major breakthroughs to share with the group. This suggests that these explorations remain at an early
stage of development for these firms. While growth is of vital interest to each firm, open innovation
and business model innovation are not yet delivering significant growth results for them.
Open Afternoon Session
Allen Miner, Sunbridge
Allen Miner gave the first presentation in the open afternoon session, which was attended by more than
200 people. Mr. Miner has extensive experience as an entrepreneur in Silicon Valley and Japan, and also
as an intrapreneur, based on his time at Oracle. He was responsible for launching Oracle’s business in
Japan in the early 1990s. He recounted that his business model had to be far more open than that of his
primary competitor at that time, IBM. IBM sold its database products through its own sales and
marketing organization in IBM Japan. Oracle did not have the resources to build such an infrastructure
in Japan to launch its products. Instead. Oracle chose a partnering strategy with Fujitsu, Hitachi, NEC,
and other Japanese system manufacturers.
This more open business model proved to be quite successful for Oracle. It reduced the investment the
company needed in its own infrastructure, because it utilized the extensive marketing, sales, service and
support networks of its Japanese partners. It was also a successful strategy for the Japanese partners, as
it helped them sell more of their own hardware, software and services against IBM (these companies did
not have their own database product to sell against IBM, so Oracle’s database filled a necessary gap in
their product offerings).
Mr. Miner found his Japanese partners to be excellent business partners, and his successful experience
with them has inspired him to continue to find ways to help Japanese firms partner with Silicon Valley
firms ever since. He pointed out that Japanese firms can be more patient than venture capital investors
usually are, and that there many businesses can provide important opportunities for Silicon Valley
entrepreneurs. He did voice concerns about the pace of Japanese decision-making, and the need for
greater management training in Japan for how to work with venture capital and entrepreneurs to launch
new businesses and create new business models.
Afternoon Panel
Mr. Miner’s presentation was followed by a lively panel of US and Japanese representatives, to discuss
their own experiences with open innovation. One invited panelist, John Sherry of Intel, was unable to
attend, due to mechanical problems that cancelled his flight from Portland, OR. Mr. Brad McManus was
invited to replace Mr. Sherry on the panel. The other panelists were Mr. Kevin Skillern of GE, Mr.
Masaki Shirayama of Sumitomo, and Mr. Hideki Yoshizawa of Fujitsu.
Hideki Yoshizawa spoke of the difficulty of Japanese engineers accepting the work of other companies,
especially startup companies. This is an example of the Not Invented Here syndrome that afflicts many
companies with a strong internal engineering organization. The NIH syndrome is made more difficult by
the fact that most startup technology is not yet of high quality, nor is it yet very scalable. This makes it
hard to integrate these technologies with more mature, robust technologies from Japanese
headquarters.
Masaki Shirayama echoed Mr. Yoshizawa’s statement about the NIH syndrome. At SEI, they are trying
to grow a culture that welcomes external technology as part of their innovation approach. While this
has developed well within the San Jose, CA office of SEI, it has proven to be more difficult to bring this
new cultural attitude to Japan as well. And in the social media space, SEI is seeing signs of success in its
work with startups. These early successes may help to change the culture in the company over time.
Kevin Skillern recounted his experience at GE with its ecomagination initiative in green and renewable
energy. Working with four independent VCs, GE launched an invitation to the world to post ideas to
launch new ventures in the green energy space. 4,000 venture concepts were posted to the
ecomagination website, and this required a great deal of work to filter these down. Inside GE, the
initiative had senior sponsorship from the CTO, and GE scientists and engineers helped to review the
proposals. In the end 23 ventures were funded, 17 of them by GE. GE also made an acquisition that it
likely would not have known about, had it not engaged in this process.
Brad McManus shared his experience helping Panasonic make venture investments in numerous startup
firms in Silicon Valley. Panasonic has evolved a number of ways to work with entrepreneurs, so that
venture investing is now just one of many possible relationships that Panasonic has with startup
ventures. Joint development agreements are another frequent tool that Panasonic uses, and startups
greatly appreciate Panasonic’s ability to test their technology in a large company, and potentially have
Panasonic as a reference account for other customers they try to sell to. This is a very useful way for
many large companies, including Japanese companies, to work with startup companies.
Professor Chesbrough offered some concluding remarks. He echoed Mr. Miner’s earlier observations of
the opportunities from business partnerships between US and Japanese businesses. He mentioned that
most Japanese businesses achieved their business success growing in Japan. However, the next phase of
growth for most if not all of these same companies will see most of that growth occur outside Japan.
Top management teams need to become more international, and also the boards of companies similarly
need to become more international.
He also mentioned that Japanese culture was quite popular in the US, particularly manga, harijuku
fashion, and even sushi (there were very, very few sushi restaurants in the US thirty years ago- now they
are quite prevalent in every part of the country!) These are great strengths for Japanese businesses to
build upon. He reported that Japanese universities also have a critical role to play. They need to
become more open, both to attract foreign students to study there, and to send more Japanese
students to the US. Thirty years ago, there were large numbers of Japanese students in many of the
leading US universities, such as UC Berkeley. Today, there are many more students from China, from
Korea, and from India, at UC Berkeley than there are Japanese students, a pattern that is true across all
of the major US universities. This suggests that Japanese universities are not as outwardly focused as
they were a generation ago. He encouraged the audience to work to reverse this trend, to promote
greater exchange of students between the US and Japan.
Concluding Observations
At this writing, Japan has suffered through two “lost decades”, as the country’s economy has grown only
very sluggishly. The country’s population is aging rapidly, and the large amount of debt incurred by the
country in support of its safety net now burdens the society as well. It is clear that Japanese companies
cannot achieve their growth objectives in the future by remaining focused upon the domestic Japanese
market. Even if Abe-nomics succeeds in energizing consumption activity, the macroeconomic factors of
aging and debt mean that Japanese industry must look outward for its next phase of growth.
Japan remains the world’s third largest economy, with enormous capabilities in science and technology.
Yet many of the firms in the JSVIF appear to lack confidence in their ability to innovate in markets
outside Japan. This lack of confidence may be due in part to the very success that Japanese firms have
enjoyed in world markets over the past 40 years. The internal processes and the business models that
propelled many Japanese firms to leadership in their respective industries now appear to have
atrophied. Technological prowess or new inventions do not by themselves necessarily lead to
innovation or the ability to profit from these inventions.
This deliberate pace of decision-making served Japanese firms well as they adopted many innovations in
lean manufacturing and quality management, as they assured that every part of the organization was
consulted and included in these in adopting these innovations. It seems clear, however, that the next
phase of innovation will require a different set of behaviors by Japanese firms. Growing business
outside Japan, robust experimentation with alternative business models, close collaboration with
outside partners and customers, all will require a faster pace of decision-making by Japanese firms.
Open innovation, in turn, will require more internal openness from Japanese firms, as companies seek to
align with external partners effectively. And business model innovation is becoming a new imperative,
so that even outstanding technology will need novel commercialization strategies in order to deliver
improved growth and profits for Japanese firms.
Silicon Valley’s innovation processes differ in every respect from the above processes in large Japanese
firms. It is not that Silicon Valley entrepreneurs and investors are smarter than Japanese managers.
They are not. They are, however, able to take risks, and make decisions, in much less time, based on
much less data, than is typically required for Japanese firms’ decisions. The Open Innovation paradigm
requires a peer-to-peer communication style and faster decision making process not prevalent in
Japanese corporate society. Business model innovation, in turn, requires a commitment to experiment
with alternative business models, some of which are likely to fail, on the journey to developing a new,
strong model.
Japanese firms have much to offer Silicon Valley firms and VCs. But Japanese firms will need to create
intermediate organizations to buffer the slow internal machinery of the powerful headquarters in Japan
from the super-fast world of Silicon Valley. Intrapreneurs are also needed, as it is people and their
relationships that will navigate the differences between these two worlds. Japanese firms must elevate
the importance they place on innovating new business models, which will require experiments that cut
across many departmental units and functions. Prudent risk-taking must be encouraged, not punished.
Working with selected startup companies and VC firms will become required skills. There are also more
opportunities to open up Japanese innovation to increase collaboration with leading universities, both in
Silicon Valley but also in Japan and around the world.
All of these changes are feasible for Japanese firms. But each will require committed and inspired
leadership from the top of Japanese organizations to realize the benefits of a more open innovation
system. While NEDO, JETRO and other Japanese governmental organizations can support and facilitate
this process, there is no substitute for strong leadership by the leaders of Japanese companies, in order
to make these changes. The presentations from the November 1
st
meeting suggest that Japanese firms
are willing to experiment with open innovation and with startups as part of their US operations. It is not
at all clear that they are willing to adopt open innovation back in their home market of Japan.
doc_479329073.pdf
On this detailed illustration concerning john wolpert, entrepreneur in residence at ibm.
Open Innovation: The Response
of Japanese Firms
Report to NEDO
Henry Chesbrough, Principal Investigator
Meyer Family Fellow
Haas School of Business
UC Berkeley
Table of Contents
I. Acknowledgements
II. Executive Summary
III. Open Innovation – definition, principles, impact
IV. JSVIF Company Presentations and Panelist Feedback
V. Open Session Presentations and Discussion
VI. Concluding Observations
VII. Appendices
A. List of attending participants and firms
B. Agenda and Notes from September 28, 2012 meeting
C. Agenda and Notes from December 14, 2012 meeting
D. Agenda and Notes from February 15, 2013 meeting
E. Agenda and Notes from November 1, 2013 meeting
I. Acknowledgements
This report which was financed and commissioned by the Silicon Valley Office of the New Energy and
Industrial Technology Development Organization (NEDO), reflects the efforts of a number of people who
were necessary to its realization. The initiative for this project came from Mr. Osamu Onodera and then
continued by Go Takizawa of NEDO, who also provided critical oversight and feedback throughout the
project. Mr. Toshiro Okada of JETRO and Mr. Tomotaka Kuwahara of the Consulate General’s office in
San Francisco provided input and supplementary organizational support. Critical organizational support
throughout the project came from Ms. Aya Iwasuji of NEDO.
Additional thanks are due to the more than 30 people from Japanese companies operating in the US
who participated in one or more of our meetings, and also provided additional feedback in other, more
casual settings. They are listed in the first appendix (Appendix A) to this report. I sincerely hope that
this report will be useful to each of them, as they strive to manage their innovation challenges.
Finally, thanks to Yu Jin Kim, a promising PhD student at the Haas School of Business at UC Berkeley, for
taking notes of each of the meetings, and contributing her perspective of effective Korean innovation
management practices as well.
II. Executive Summary
Japanese companies were global innovation leaders in numerous industries in the 1980s and 1990s.
From electronics to automobiles to shipbuilding to consumer products, the rest of the world stood in
awe over the achievements of companies such as Matsushita, Toyota, Mitsubishi, and Sony. While
some companies such as Toyota remain at the cutting edge and most Japanese companies’
technological capabilities remain strong, more recently the comparative position of Japanese companies
in global innovation has been eroded in a number of industries, especially consumer electronics. One
possible reason for this is the growth of open innovation around the world in the past ten to twenty
years, and the slow response of Japanese firms to the opportunities offered by open innovation. A
second reason may be that Japanese firms, while remaining strong in technology, have not been able to
lead the development of new business models.
In this report, we present an overview of open innovation, along with responses to open innovation
presented by executives from leading Japanese companies. We then introduce the concept of business
model innovation, and discuss its importance to the revitalization of Japanese businesses. These
discussions were led by UC Berkeley professor Henry Chesbrough, who is credited with originating the
term open innovation, and whose more recent work has emphasized innovation in business models and
in services.
It appears that open innovation is becoming better known among leading Japanese firms. To date,
however, its primary implementation has been in the US market, and secondarily to other markets
outside Japan. Open innovation must first prove its ability to generate more revenue and more profit in
these peripheral markets, before Japanese companies will choose to adopt it for their core market in
Japan.
III. Open Innovation: Definition, Principles, Impact
The open innovation paradigm can be understood as the antithesis of the traditional vertical integration
model where internal innovation activities lead to internally developed products and services that are
then distributed by the firm. I term the vertically integrated model a Closed Innovation model. Put into
a single sentence, open innovation is the use of purposive inflows and outflows of knowledge to
accelerate internal innovation, and expand the markets for external use of innovation, respectively.
1
Open Innovation has become a new paradigm for organizing innovation. It assumes that firms can and
should use external ideas as well as internal ideas, and internal and external paths to market, as they
look to advance their innovations. Open Innovation processes combine internal and external ideas
together into platforms, architectures and systems. Open Innovation processes utilize business models
to define the requirements for these architectures and systems. The business model utilizes both
external and internal ideas to create value, while defining internal mechanisms to claim some portion of
that value.
It is helpful to visualize this transformation via “before” and “after” diagrams of an innovation process
(see Figures 1 and 2 below).
Figure 1 shows a representation of the innovation process under the previous Closed model of
innovation. Here, research projects are launched from the science and technology base of the firm.
They progress through the process, and some of the projects are stopped, while others are selected for
1
See H. Chesbrough, W. Vanhaverbeke and J. West, Open Innovation: Researching a New Paradigm, Oxford
University Press, 2006, p.1.
© 2004 Henry Chesbrough 2
The Current Paradigm: A Closed
Innovation System
Research Research
Investigations Investigations
Development Development New Products New Products
/Services /Services
The
Market
Science
&
Technology
Base
R D
further work. A subset of these are chosen to go through to the market. This process is termed a
“closed” process because projects can only enter in one way, at the beginning, and can only exit in one
way, by going into the market. AT&T’s Bell Laboratories stands as an exemplar of this model, with many
notable research achievements, but a notoriously inwardly focused culture. Other celebrated 20
th
century examples of this model include IBM’s TJ Watson Research Center, Xerox PARC, GE’s
Schenectady laboratories, Merck, and Microsoft Research. (It is worth noting that each of these storied
institutions has greatly altered its innovation model in the past decade.) In other countries such as
Japan, the Closed model remains quite popular to this day.
Figure 2 shows a representation of the Open Innovation model. Here, projects can be launched from
either internal or external technology sources, and new technology can enter into the process at various
stages, the Outside-In portion of the model. In addition, projects can go to market in many ways as well,
such as through outlicensing or a spin-off venture company, in addition to going to market through the
company’s own marketing and sales channels. This is the Inside-Out part of the model. I labeled this
model “open” because there are many ways for ideas to flow into the process, and many ways for it to
flow out into the market. IBM, Intel, Philips, Unilever, and Procter & Gamble all exemplify aspects of
this open innovation model.
The concept of open innovation has made a significant impact, both in academia and in industry
practice. There are more than 6,700 citations over the past 10 years to the book Open Innovation from
academic scholars, according to Google Scholar. A recent survey conducted by the Fraunhofer Institute
in Germany for the Center for Open Innovation at UC Berkeley’s Haas Business School found that 78% of
© 2004 Henry Chesbrough 5
Current
Market
Internal
Technology
Base
R D
The Open Innovation Paradigm
Technology
Inlicensing
New
Market
Technology Spin-outs
External
Technology
Base
Other Firm’s
Market
CVC
Investing
Product/Business
Acquisition
Licensing
companies with sales of more than US$250 million in the US and Europe were utilizing open innovation.
A survey is under development in Japan to assess the prevalence of open innovation there as well.
Preliminary indications suggest that the prevalence is far lower at the present time.
What are the reasons for the growing interest in and use of open innovation shown above? One factor
is the shift in the mix of companies performing R&D activities. The table below from the National
Science Foundation shows a remarkable shift in R&D. In 1981, companies of more than 25,000
employees accounted for more than 70% of all R&D spending. In that same year, companies of fewer
than 1,000 employees accounted for less than 5% of spending. By 2007, the largest firms’ share of R&D
spending fell to 35%, while the share of R&D spending from the smallest firms grew to 24%. Even the
largest, most effective companies cannot afford to ignore the wealth of external R&D outside their own
four walls in today’s environment.
Table 1 – Share of R&D spending by Company Size, selected years
These shifts imply a new set of principles for effective R&D management, as shown in the table below.
Table 2 – Contrasting Principles of Closed and Open Innovation
Closed Innovation Principles Open Innovation Principles
The smart people in our field work for us “Not all of the smart people work for us.”
We need to work with smart people inside
and outside our company.
To profit from R&D, we must discover it,
develop it, and ship it ourselves
External R&D can create significant value;
internal R&D is needed to claim 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 in
order to profit from it.
The company who gets an innovation to
market first, will win.
Building a better business model is better
than getting to market first
If you create the most, and the best ideas
in the industry, you will win
If you make the best use of internal and
external ideas, you will win
We should control our IP, so that our
competitors don’t profit from our ideas
We should profit from others’ use of our
IP, and we should buy others’ IP whenever
it advances our own business model.
Working with Venture Capital: Presentations to the Nov. 1
st
Meeting
Japanese firms have their own sources of dynamism, though these differ in many ways from the Silicon
Valley model. While venture capital does exist in Japan, its size is significantly smaller than it is in the
US. Much of the investment that does occur arises at later stages of a company’s growth (often termed
“mezzanine financing”). Moreover, the sources of capital for Japanese venture capital are frequently
intertwined with the main banking system that supports the leading industrial firms in Japan. These
sources are unwilling to support startup activity that threatens to disrupt the businesses of the large
businesses that provide the bulk of their capital. This is in sharp contrast to the US venture capital
system. There, the limited partner/general partner model sharply separates the sources of capital from
the investment decisions made with that capital.
Instead, many Japanese companies pursue new innovation opportunities either through their existing
businesses (for sustaining technologies that fit with existing business models) or through spin-off
companies for more disruptive technologies. This hiving-off process is far more developed in Japan than
it is in the US. A simple example would be the history of one of the JSVIF members, Fujitsu. Fuijitsu was
spun off from Fuji Electric in 1937. Fuji Electric was itself formed in 1923 as a joint venture between the
Furukawa Group and Siemens. As Fujitsu grew, it later spun off Fanuc to focus that organization on
automotive automation technologies. Today, Fujitsu exists as a group of companies that target different
markets. A second example would be the Matsushita group companies. A number of these companies
trade as independent stocks on the Nikkei stock exchange.
This combination of affiliated companies with independent stock listings provides coordination, but also
autonomy in pursuing new innovation opportunities. It is quite possible that open innovation may
thrive more readily in these more autonomous organizational entities, than in the core business of the
parent firm. Alternatively, Japanese companies could experiment with open innovation in these
affiliated entities first, as they decide whether and how to apply open innovation in their core business
areas.
KDDI
KDDI presented its recent experience with Silicon Valley companies. It reported some good successes.
It has partnered successfully with some startup companies in silicon valley, including fuhu, Moxtra, and
localmind. It has deployed some of its visualization technologies from its R&D organization in the social
media market in the US. And it has accelerated its internal R&D activities by partnering with PARC and
Mozilla.
KDDI described its future as blending open innovation with business development. In the US market this
should be quite promising. So far, it appears that KDDI is emphasizing open innovation in its strategy for
the US market. There seems to be less use of it in its home market of Japan. It remains to be seen if
open innovation will also prove to be a useful tool there as well.
Meidensha
Meidensha outlined a similar picture. It experimented with joint ventures back in 1998, taking a 51%
share and leaving 49% with the JV partner. Then in 2002, it came to Silicon Valley with a program of
corporate venture capital investment. However, these initiatives were closed down during the financial
crisis of 2008 The company is today employing a network of strategic alliances with partners that is
more capital efficient and adaptive than the earlier initiatives. These alliances began in areas close to
the core business, but are now expanding to new technologies and new markets. Working with startup
companies has been an important way for Meidensha to enter into these new technology and market
areas in the US market. Like KDDI, open innovation appears to be a strategy for Meidensha to grow its
US market presence. It is not yet a tool for increasing its sales in its Japanese market.
Konica-Minolta
Konica-Minolta was quite honest about its experience with open innovation to date. The company has
worked closely with universities on at least 5 different projects. Two of these projects have now spun
out of the university into new startup companies. This is an interesting combination of spin-off and
startup that was discussed above. However, the time scale needed for these projects is long, and it is
different to foresee the market needs and opportunities. There remains a large gap between a viable
technology and a viable, scalable business. These activities also appear to be focused within the US, and
do not seem to be employed to much effect in Japan to date.
Panasonic
Panasonic also shared its experience in Silicon Valley. It too struggles with long time scales, but has had
some success in both joint development agreements with startup companies and with later acquisition
of startups they initially partnered with. Panasonic worked closely with a UC Berkeley spin-off company,
SiBeam, on a joint development project. This was successful, causing the company to place the
technology into some of its high-end television consoles. Panasonic also worked successfully with a UK
startup company, Elixent, on a project to create a new image codec format for broadcasting. Panasonic
then chose to acquire the company, due to the strong fit between the technology and Panasonic’s
strategic objectives. They also reported that there are significant challenges to manage in collaborating
with these methods. There are enormous cultural differences to manage. There are many
communications problems to sort out. It is critical to sort out company confidential information, to
make sure that such information remains within the firm. And it is critical to craft win-win joint
development agreements (JDAs), if the collaboration is to sustain itself over time. Panasonic’s open
innovation efforts clearly extend beyond the US to Europe as well, in contrast to the other presentations
in this session.
In the ensuing discussion, a number of interesting points were made:
Shun Aramaki, Director of Presidio Ventures, a corporate VC arm of Sumitomo Corporation gave his
insights on working with VCs and startups and noted that it was always a challenge to align the
expectation of timeframes between VCs and startups on the one hand and Headquarters (i.e. a large
Japanese company) on the other. This perspective was echoed by other panelists as well, and is typical
not only of Japanese companies, but large companies in the US as well.
Kevin Skillern, recently employed by GE Venture Capital, discussed the opportunities and challenges of
corporate venture capital. He explained how GE used connections with the VC community to identify
new investment opportunities, and the GE ecomagination experiment that led to the formation of 23
new startup venture firms in green and renewable energy. While GE’s energy business is quite large
(roughly US$40 billion annually in revenue), most of its work is in large-scale power generation, not
these emerging areas. The purpose of this initiative was to deepen GE’s exposure to novel, green and
clean-tech technologies and ventures in the energy market.
Jim Spohrer, Director of IBM University Programs Worldwide, discussed the IBM model of sharing
knowledge and technology with startup firms, but not investing in them directly. Since IBM made many
sales alongside the sales of startup firms’ products, IBM was a powerful sales partner for many startups
looking to grow their business. This allowed IBM to align itself quite rapidly with promising startups,
since their own revenues benefited directly from the success of these startups. In turn, working with
IBM brought greater credibility to these young startups, and helped them get business with large
companies, who liked buying from IBM.
Brad McManus, former director of corporate venture investing for Panasonic, discussed the challenges
of coordinating VC processes with typical Japanese corporate planning processes. He explained that, as
Shun Aramaki noted above, there is a need for faster decision-making in Japanese firms, along with
greater delegation of decision authority for small-sized investments. He is establishing a new venture
fund with a select number of limited partners who have similar strategic interests. But his firm will act
as the general partner, enabling them to make fast decisions of whether and when to invest in particular
promising new ventures.
John Wolpert, Entrepreneur in Residence at IBM, discussed his experience with working in startups, and
creating new businesses inside large corporations. Each had its advantages, but entrepreneurial
initiative is required in both settings in order to achieve a new, successful business. He pointed out that
these internal entrepreneurial roles do not always offer secure long-term employment with the firm,
owing to the higher level of risk involved.
1. Measuring the ROI for Japanese companies of working with startups
It is an established practice of most large companies (not only large Japanese companies) to carefully
measure the ROI of innovation investments. Yet our discussion concluded that this approach may be
misguided when working with startup firms. Because the firms are quite young and quite small, there is
very little quantitative information available to evaluate their activities. Striving for too much detailed
information on potential markets and too much time invested in gathering information could often lead
to the collaboration opportunity to be lost, as startups do not have the time or the resources to gather
such information or to wait for a long decision making process. Striving for more concrete information
and data, , corporate evaluations of ROI effectively push companies back into the Red Oceans of
intensely competitive markets, where there are far more data available instead of pursuing Blue Oceans
of new, untapped markets. This defeats the purpose of using startups to explore new markets.
Rather, it may be better to follow the practices of typical VC firms in measuring the performance of
startups, where funding is tied to the achievement of milestone events. A VC typically makes an initial
investment decision by setting a decision date and through a focused discussion. This allows VCs to
avoid losing investment opportunities by taking too much time in the decision making.
It was also noted that the value of the startup resides in the people. Having a good technology and
product are a necessary condition but when considering a buyout, whether the key personnel will
remain is a key factor.
Another way to utilize VCs is to use VC financing for “spin off ventures”. From the point of view of the
company spinning off the venture, it often requires IP to remain in the company and wants to maintain
certain control. As salaries and remuneration is better in the parent company, main technical staffs are
reluctant to go to the spin-off. From the point of view of VCs considering the funding of the spin off, it is
important that 1) IP belongs to the spinoff, 2) the firm does not try to control the spinoff, and 3) key
members who dealt with the technology/product will be working at the spin off.
The bigger opportunity for JSVIF members, though, is to realize that Japanese companies have a lot to
offer VC firms in Silicon Valley. VC firms make their money by exiting their investments through either
an initial public offering (IPO) or an acquisition of the venture by a much larger firm. These days, most
exits are coming from acquisition, not IPOs. Japanese firms are attractive to VC firms because they
could be that acquiring firm. As many of our panelists noted, it is not necessary to invest in VC-funded
startups to work with them. Joint development agreements, letters of intent to be early customers, and
technology sharing agreements can expose Japanese firms to many of the valuable technologies (and
business models, see below) being developed by startup companies. Large companies can be a great
first customer or a collaborator in order for startups to gain credibility. Large companies actually doing
business in various areas have valuable insights that VC partners do not have by virtue of their being in
these businesses. IBM, for example, works with VC firms this way.
2. The Second Session: Business model innovation
Professor Chesbrough pointed out that business model innovation is as valuable as technology
innovation, yet most large firms (including Japanese firms) have well developed processes and budgets
for technology development, but not for business model innovation. Much of the value created by
startup firms in Silicon Valley comes from their willingness to explore alternative business models for
new technologies, not just the technologies themselves. Google, for example, was perhaps the 14
th
search engine developed to search the internet for useful information. Its original business model was
not strong, causing Yahoo to decline the chance to acquire the company for $10 million in 2000. Only
after the AdWords and AdSense keyword auction business model was adopted did Google’s business
take off.
Steve Blank has defined a scalable startup as “a temporary organization searching for a repeatable and
scalable business model”.
2
This makes an important distinction. Most small businesses are created and
operated to remain small. Only a few aspire to become large businesses, and only a few of those
manage to attract the capital, the talent, and the customers needed to become a significant business.
But these few scalable startup successes often pioneer new business models and change the game for
the rest of the industry. Their importance is thus much larger than their numbers alone would indicate.
Recent research from the Kauffman Foundation also shows that the majority of job growth in the past
two decades in the US has come from exactly these kinds of startups.
3
Japanese Experiences with Corporate Business Model Innovation- reports from the Nov. 1
st
meeting
As research on open innovation has progressed, it is becoming clear that innovation must go beyond
products, services and underlying technologies. Business models themselves must be innovated. This is
a daunting challenge, as most companies in the US, Japan, and elsewhere lack any clearly defined
process, resources, organization, or authority to experiment with and deploy alternate business models.
In the afternoon session, this was the topic of three different company presentations from Japanese
firms.
2
Steve Blank and Robert Dorf, The Startup Owners Manual, 2012.
3
Kauffman Foundation, need the cite.
Sumitomo
Sumitomo Electric shared parts of their Vision2017 program. This has three components, all oriented
around growth. New Growth in Current Business Fields involved continued investment in their existing
domains of Eenrgy, ICT, Automotive, Electronics, and Industrial Materials. Expansion into Integrated
Business Fields contemplates new sources of growth from integrating two or more sets of technologies
from their existing domains, such as Environment and Infrastructure. The third area is Challenging New
Business Fields, such as Life Sciences and Resources, that extend beyond the existing technological
capabilities of the company.
To achieve business model innovation, SEI is adding marketing and strategic planning functions to its
R&D group, as shown in the figure above. The existing R&D functions will now house people from the
Sales organization (for new business marketing and promotion) and from Strategic Planning (for
corporate planning). They commenced a process of business model trial and error in the US in 2009,
and chose Silicon Valley as the location for these experiments. The speed of Silicon Valley was a key
reason for this selection. They are now working on how to integrate the learnings from this work with
the SEI headquarters back in Japan.
Obayashi
Obayashi Corporation spoke about the need to extend Open Innovation, so that the end user and
customer were the focus of innovation efforts. (A very similar observation was made in Open Services
Innovation
4
). As a contractor, Obayashi is fundamentally a services provider. Their growth strategies
4
Henry Chesbrough, Open Services Innovation, Jossey-Bass, 2011
include further global expansion (over 80% of sales are from the Japanese market currently), creation of
new enterprises, and development of new technology (see figure below).
In 2012, they established one of these new businesses, the Obayashi Clean energy Corporation, which is
entering the power generation business with green and renewable technologies. A more distant future
business was the Space Elevator, which is currently just an exciting concept.
NTT
NTT spoke next. One of the world’s largest and most technologically advanced companies, NTT is a
household word in Japan, but nearly unknown in the US. The company is moving from a provider to a
“value partner” in its businesses, adding more services to its offerings and placing more focus on the
consumer. The Global Cloud will be the platform for delivering many of these services. They recently
opened a new subsidiary, NTT –i-Cubed, in Silicon Valley to support the growth of NTT’s business outside
Japan.
While this lab is very young, they are already engaged in projects on open-source software and service
visualization, as shown in the figure above. The business model work at NTT i-Cubed, however, remains
at a very early stage of exploration.
Yamato
Yamato Transport discussed its approach to business model innovation, with its Value Networking
Design, as shown in the figure below.
This involves significant process improvements on its already leading delivery capabilities. They are
trying to create processes that involve non-stop movement of parcels, to increase delivery speed for
same day delivery in certain cities. They are working on demand chain (along with supply chain)
management, to provide exactly what is needed when it is needed. They are pioneering next day
delivery in parts of China, and using a cloud platform to deliver these new services. As the final point in
the figure claims, the cloud platform will allow new companies to work with Yamato and not need to
invest in their own warehouses or personnel for these functions.
Hitachi
Hitachi was the last presenting company. Like many of the other companies, it is seeking growth
through a combination of greater innovation in services, more global business expansion, and internal
transformation to become a faster organization. Open innovation will be a process through which the
strong R&D functions of the company engage and co-create innovations with customers and business
partners to solve important business issues. Hitachi is expanding its R&D network, with new
laboratories for Big Data in the US, new materials development in China, new rail research in Europe,
and a very recent lab in Brazil. They are already providing traffic management services in the UK today,
and deploying cloud services at construction worksites to increase equipment utilization, improve
equipment tracking, reduce construction delay and increase worksite productivity. A cloud platform will
be the key delivery mechanism for these services. Hitachi’s presentation was impressive for the global
reach of its innovation initiatives.
Analysis of the Japanese Experiences
Looking across these presentations, a number of points can be observed. One is the growing
importance of the cloud as a backbone for delivering new services and higher value added for
customers. Another is the growing importance of the US, both as a testbed for new business models,
but also as a large, friendly market for Japanese firms to grow. By contrast, the Japanese market is
aging, and growth in that market is likely to be much slower than in the US. A third is the increasing
importance of services, as opposed to products, in the new growth strategies of these firms. This will
put new demands on the Japanese R&D organization, which traditionally is optimized for product
innovation.
A number of JSVIF firms (Ajinomoto, Yamato Transport, Tokyo Gas, Daiwa House, Daikin, Omron,
Sumitomo Electric) made presentations on their experiences with business models either existing or for
new business areas using the business model canvas. Ajinomoto introduced how it is diversifying from
its current seasoning, food and amino acid business into nutritional products/medicine which requires
greater coordination with hospitals and doctors. Yamato Transport has gotten new ideas for business
model innovation from its employees and stated that the flexibility of the services industry may have
some advantages in terms of business model innovation. Starting from a simple parcel delivery service,
Yamato is exploring using the delivery infrastructure to provide repair and maintenance activities for
electronics and other appliances. Daikin explained its existing model of providing 24hr/7 workable air-
conditioning to businesses through its extensive services network which it has expanded successfully to
China and is eying the US market through the acquisition of Goodman.
Yet the discussion of the JSVIF revealed that no companies had established processes to explore and
manage the development of alternative business models for promising new technologies, nor were they
considering the active use of startups or spin-offs to explore alternative business models. This may end
up being one of the primary reasons to engage with Silicon Valley startups and VCs, because business
model innovation is a core part of their entrepreneurial process.
At a deeper level, the reported activities from the participating companies showed that each was
exploring new possibilities for open innovation and for business model innovation, yet no firm had any
major breakthroughs to share with the group. This suggests that these explorations remain at an early
stage of development for these firms. While growth is of vital interest to each firm, open innovation
and business model innovation are not yet delivering significant growth results for them.
Open Afternoon Session
Allen Miner, Sunbridge
Allen Miner gave the first presentation in the open afternoon session, which was attended by more than
200 people. Mr. Miner has extensive experience as an entrepreneur in Silicon Valley and Japan, and also
as an intrapreneur, based on his time at Oracle. He was responsible for launching Oracle’s business in
Japan in the early 1990s. He recounted that his business model had to be far more open than that of his
primary competitor at that time, IBM. IBM sold its database products through its own sales and
marketing organization in IBM Japan. Oracle did not have the resources to build such an infrastructure
in Japan to launch its products. Instead. Oracle chose a partnering strategy with Fujitsu, Hitachi, NEC,
and other Japanese system manufacturers.
This more open business model proved to be quite successful for Oracle. It reduced the investment the
company needed in its own infrastructure, because it utilized the extensive marketing, sales, service and
support networks of its Japanese partners. It was also a successful strategy for the Japanese partners, as
it helped them sell more of their own hardware, software and services against IBM (these companies did
not have their own database product to sell against IBM, so Oracle’s database filled a necessary gap in
their product offerings).
Mr. Miner found his Japanese partners to be excellent business partners, and his successful experience
with them has inspired him to continue to find ways to help Japanese firms partner with Silicon Valley
firms ever since. He pointed out that Japanese firms can be more patient than venture capital investors
usually are, and that there many businesses can provide important opportunities for Silicon Valley
entrepreneurs. He did voice concerns about the pace of Japanese decision-making, and the need for
greater management training in Japan for how to work with venture capital and entrepreneurs to launch
new businesses and create new business models.
Afternoon Panel
Mr. Miner’s presentation was followed by a lively panel of US and Japanese representatives, to discuss
their own experiences with open innovation. One invited panelist, John Sherry of Intel, was unable to
attend, due to mechanical problems that cancelled his flight from Portland, OR. Mr. Brad McManus was
invited to replace Mr. Sherry on the panel. The other panelists were Mr. Kevin Skillern of GE, Mr.
Masaki Shirayama of Sumitomo, and Mr. Hideki Yoshizawa of Fujitsu.
Hideki Yoshizawa spoke of the difficulty of Japanese engineers accepting the work of other companies,
especially startup companies. This is an example of the Not Invented Here syndrome that afflicts many
companies with a strong internal engineering organization. The NIH syndrome is made more difficult by
the fact that most startup technology is not yet of high quality, nor is it yet very scalable. This makes it
hard to integrate these technologies with more mature, robust technologies from Japanese
headquarters.
Masaki Shirayama echoed Mr. Yoshizawa’s statement about the NIH syndrome. At SEI, they are trying
to grow a culture that welcomes external technology as part of their innovation approach. While this
has developed well within the San Jose, CA office of SEI, it has proven to be more difficult to bring this
new cultural attitude to Japan as well. And in the social media space, SEI is seeing signs of success in its
work with startups. These early successes may help to change the culture in the company over time.
Kevin Skillern recounted his experience at GE with its ecomagination initiative in green and renewable
energy. Working with four independent VCs, GE launched an invitation to the world to post ideas to
launch new ventures in the green energy space. 4,000 venture concepts were posted to the
ecomagination website, and this required a great deal of work to filter these down. Inside GE, the
initiative had senior sponsorship from the CTO, and GE scientists and engineers helped to review the
proposals. In the end 23 ventures were funded, 17 of them by GE. GE also made an acquisition that it
likely would not have known about, had it not engaged in this process.
Brad McManus shared his experience helping Panasonic make venture investments in numerous startup
firms in Silicon Valley. Panasonic has evolved a number of ways to work with entrepreneurs, so that
venture investing is now just one of many possible relationships that Panasonic has with startup
ventures. Joint development agreements are another frequent tool that Panasonic uses, and startups
greatly appreciate Panasonic’s ability to test their technology in a large company, and potentially have
Panasonic as a reference account for other customers they try to sell to. This is a very useful way for
many large companies, including Japanese companies, to work with startup companies.
Professor Chesbrough offered some concluding remarks. He echoed Mr. Miner’s earlier observations of
the opportunities from business partnerships between US and Japanese businesses. He mentioned that
most Japanese businesses achieved their business success growing in Japan. However, the next phase of
growth for most if not all of these same companies will see most of that growth occur outside Japan.
Top management teams need to become more international, and also the boards of companies similarly
need to become more international.
He also mentioned that Japanese culture was quite popular in the US, particularly manga, harijuku
fashion, and even sushi (there were very, very few sushi restaurants in the US thirty years ago- now they
are quite prevalent in every part of the country!) These are great strengths for Japanese businesses to
build upon. He reported that Japanese universities also have a critical role to play. They need to
become more open, both to attract foreign students to study there, and to send more Japanese
students to the US. Thirty years ago, there were large numbers of Japanese students in many of the
leading US universities, such as UC Berkeley. Today, there are many more students from China, from
Korea, and from India, at UC Berkeley than there are Japanese students, a pattern that is true across all
of the major US universities. This suggests that Japanese universities are not as outwardly focused as
they were a generation ago. He encouraged the audience to work to reverse this trend, to promote
greater exchange of students between the US and Japan.
Concluding Observations
At this writing, Japan has suffered through two “lost decades”, as the country’s economy has grown only
very sluggishly. The country’s population is aging rapidly, and the large amount of debt incurred by the
country in support of its safety net now burdens the society as well. It is clear that Japanese companies
cannot achieve their growth objectives in the future by remaining focused upon the domestic Japanese
market. Even if Abe-nomics succeeds in energizing consumption activity, the macroeconomic factors of
aging and debt mean that Japanese industry must look outward for its next phase of growth.
Japan remains the world’s third largest economy, with enormous capabilities in science and technology.
Yet many of the firms in the JSVIF appear to lack confidence in their ability to innovate in markets
outside Japan. This lack of confidence may be due in part to the very success that Japanese firms have
enjoyed in world markets over the past 40 years. The internal processes and the business models that
propelled many Japanese firms to leadership in their respective industries now appear to have
atrophied. Technological prowess or new inventions do not by themselves necessarily lead to
innovation or the ability to profit from these inventions.
This deliberate pace of decision-making served Japanese firms well as they adopted many innovations in
lean manufacturing and quality management, as they assured that every part of the organization was
consulted and included in these in adopting these innovations. It seems clear, however, that the next
phase of innovation will require a different set of behaviors by Japanese firms. Growing business
outside Japan, robust experimentation with alternative business models, close collaboration with
outside partners and customers, all will require a faster pace of decision-making by Japanese firms.
Open innovation, in turn, will require more internal openness from Japanese firms, as companies seek to
align with external partners effectively. And business model innovation is becoming a new imperative,
so that even outstanding technology will need novel commercialization strategies in order to deliver
improved growth and profits for Japanese firms.
Silicon Valley’s innovation processes differ in every respect from the above processes in large Japanese
firms. It is not that Silicon Valley entrepreneurs and investors are smarter than Japanese managers.
They are not. They are, however, able to take risks, and make decisions, in much less time, based on
much less data, than is typically required for Japanese firms’ decisions. The Open Innovation paradigm
requires a peer-to-peer communication style and faster decision making process not prevalent in
Japanese corporate society. Business model innovation, in turn, requires a commitment to experiment
with alternative business models, some of which are likely to fail, on the journey to developing a new,
strong model.
Japanese firms have much to offer Silicon Valley firms and VCs. But Japanese firms will need to create
intermediate organizations to buffer the slow internal machinery of the powerful headquarters in Japan
from the super-fast world of Silicon Valley. Intrapreneurs are also needed, as it is people and their
relationships that will navigate the differences between these two worlds. Japanese firms must elevate
the importance they place on innovating new business models, which will require experiments that cut
across many departmental units and functions. Prudent risk-taking must be encouraged, not punished.
Working with selected startup companies and VC firms will become required skills. There are also more
opportunities to open up Japanese innovation to increase collaboration with leading universities, both in
Silicon Valley but also in Japan and around the world.
All of these changes are feasible for Japanese firms. But each will require committed and inspired
leadership from the top of Japanese organizations to realize the benefits of a more open innovation
system. While NEDO, JETRO and other Japanese governmental organizations can support and facilitate
this process, there is no substitute for strong leadership by the leaders of Japanese companies, in order
to make these changes. The presentations from the November 1
st
meeting suggest that Japanese firms
are willing to experiment with open innovation and with startups as part of their US operations. It is not
at all clear that they are willing to adopt open innovation back in their home market of Japan.
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