Henry Chesbrough1
Innovation has come a long way in a short period of time. Just thirty years ago, thinkers like Michael Porter of Harvard were telling innovators to invest heavily in internal R&D to use as a barrier against their competitors. The idea was that this investment would differentiate the company in the market, and that only those companies who made similar levels of investment could keep up. This R&D activity was organized inside the company, and its results shared with no one until the products that resulted from innovation went to market.
The leading companies of the day were distinguished in part by the level of their internal R&D spending. Computer makers like IBM poured their dollars into new computer hardware and software. AT&T built out its Bell Laboratories research system, perhaps the most accomplished industrial lab of its day. Auto makers such as Ford, GM, and Chrysler spent billions each year in rolling out new cars and trucks. Pharmaceutical giants such as Merck created powerful research arms that reached back into the basic sciences of biology and chemistry, and filled their product pipelines with compounds they discovered and developed inside their own four walls.
Today things are very different in most industries, not only in the US but around the world. The model of industrial innovation has moved on from this inwardly focused, vertically integrated approach that I call a Closed Innovation system. Open Innovation today prevails, as organizations make extensive use (and re-use) of external ideas and technologies in their own innovation activities, while unused or under-used ideas and technologies internally are allowed to go to the outside for others to utilize. The result is a much deeper division of innovation labor, where specialist firms contribute discoveries and innovations that connect together to form a web of innovation. Startups and small to medium-sized enterprises and even individuals play a far more significant role, while the large firms seek to attract and collaborate with these small, agile, skilled participants.
Data from the National Science Foundation on R&D spending in the US over the past thirty years bears out the extent of this shift (see Figure 1).
Figure 1. Percentage of R&D performed by companies of different sizes, 1981–2011
Sources: National Science Foundation, Science Resource Studies, Survey of Industrial Research Development 1999, 2001, 2003, 2006, 2008, 2011.
This chart shows that large firms with more than 25,000 employees were responsible for 70% of the industrial R&D spending done in the US in 1981. But their share of R&D spending shrank by half to 35% in 2007. In contrast, small firms with less than 1,000 employees increased their share of R&D spending from 4% to 24% during that period. Note that large firms are still important in industrial R&D because their share is still very big (35%). The amount of R&D spending in large firms increased from $21.2 billion in 1981 to $94.8 billion in 2011, a factor of 4.
However, the increase in R&D expenditures of small firms is even more impressive. Firms with less than 1,000 employees spent $64.7 billion on R&D in 2011 compared to $1.3 billion in 1981—50 times as much spending! Another way to look at this is smaller firm R&D spending overall has grown 10 times as fast as large company spending over these 26 years. Clearly, the world of innovation has changed.
You can see this new, deeper division of innovation labor in practice, as well as in the statistics. IBM now makes more money from its services business (where it supports the hardware and software of many other companies, including its competitors) than it does from its traditional product businesses. Cell phone manufacturers strive to attract applications developers to their platforms to boost the range and quality of services that customers can install on their phones. The pharmaceutical industry now licenses in most of its compounds in its product pipeline from external sources such as universities and young biotech firms, rather than carrying projects from the laboratory bench all the way through to market. Auto makers now rely primarily upon their suppliers and their suppliers’ suppliers for new innovations.
Within this overall shift toward more open innovation, crowdsourcing is also growing in importance. The fundamental insight underlying crowdsourcing—which is shared by open innovation—is that useful knowledge is widely distributed around the world. No one has a monopoly on that knowledge. Once you accept that, you must face the question of how best to access the wealth of knowledge around the globe.
Crowdsourcing is a powerful answer to that question. Done right, it taps into the knowledge, creativity, insight, and skill of the world around you. It can find solutions to previously intractable problems. It can help you predict next month’s sales, or next season’s fashions. It can improve the management of your supply chain. It can enhance your customers’ experience of your products and services. It even frequently outperforms polling in predicting the winners of elections. And often these improved outcomes can be created with surprisingly modest investments.
You will read about many crowdsourcing examples in this book, so I will confine myself here to one, the company Innocentive. Innocentive has built an online network of more than 200,000 people around the world who go to its website to consider challenges that companies have posted prizes to have solved. These problems are usually technical in nature, and quite difficult to solve, which is why leading companies that have not found answers internally have reached out to the Innocentive community for solutions.
One intractable problem arose from the aftermath of the Exxon Valdez oil spill in Alaska. The crude oil spilled had settled on the ocean floor, hundreds of feet below the surface in very cold water. The combination of pressure and cold temperatures made it impossible to suck up the oil from the ocean floor. This was the challenge presented to the Innocentive community.
Happily, a solution was found from Innocentive’s crowd of hundreds of thousands of experts. But that solution came from an unlikely place, one that suggests the value of the crowdsourcing approach. An engineer with extensive experience in the cement industry realized that cement companies employed vibration to keep cement from setting before it had been delivered and deployed in its final location. That same vibration could make the oil on the ocean floor more viscous, allowing it to be sucked off of the ocean floor. A test of the idea demonstrated that it actually worked. The prize was paid, and the technique recovered a great deal of oil that might otherwise have lingered for decades, continuing to damage the surrounding environment.
As you will also read in this book, crowdsourcing is not a panacea for all ills, and can lead to terrible results if it is not managed properly. If, for example, the “crowd” of contributors are not independent of one another, the crowd can become a herd, charging off in a single direction, instead of balancing the different perspectives of people to provide a reliable prediction of a future event or activity.
Crowdsourcing is thus a powerful resource for innovators. Like most powerful resources, this power can be mismanaged as well. That is why you would be well advised to read this book, drink in its insights, and then apply it to your own challenges. A world of people and organizations are available to assist you, if you have the commitment and care to engage them properly.