Successful innovation has been become critical to corporate success.
The importance of innovation was reinforced by the 2011 State of the Union address by US President Barack Obama who mentioned "innovation" seven times in his speech, an unprecedented focus on this issue.
Innovation is critical because of the new business land-scape characterised by more intense and global competition. This reality demands a different approach to innovation, one based on collaboration and the strategic use of intellectual property. For example, many of the recent innovations in the smartphone market have come from outside the indus-try.
In 2010, two of the three major smartphone operating systems were Apple’s iOS and Google’s Android, both from companies outside the handset, and even the telecom, industry.
These developments demonstrate the nature and source of competition is not as predictable as it once was. Who would have predicted the ability of the iPhone to play music and use "apps" would be as important as its phone functions?
In fact, the vast majority of components for both the iPhone and the leading Android phone, or the Droid, are made by third parties, not Apple or Motorola.
This type of collaboration has become essential for success even for Motorola, a traditional manufacturer of handsets.
The complexity of these products and the rapidity of the demand for new versions cannot be met by a single company, they demand collaboration.
In software, there is a similar trend. The open-source movement has dramatically altered the software business landscape.
Mark Driver, Gartner’s lead analyst for open source software predicted in his November 2010 report that by 2016, open-source software would be included in mission-critical software portfolios within 99% of Global 2000 enterprises, up from 75% in 2010.
Software is now "assembled" from existing third-party components rather than, as in the past, being written from scratch.
Most open-source software programs are developed by a large number of programmers from different companies who are informally organised into projects rather than corporate entities. For example, the open-source Apache web server software consistently dominates its market (its current market share is close to 60%) against competition from large companies such as IBM and Microsoft.
The open-source Linux operating system is one of the few competitors to Microsoft’s operating systems and the open-source Android operating system has become the third most widely used smartphone operating system in less than three years.
Moreover, these programs no longer rely on contributions by individual contributors working on their own time but are supported by major corporations. For example, in 2010, 70% of Linux contributions were made by corporations.
Ironically, open-source software, which is distributed without charge, represents a return to the treatment of software at the beginning of the computer industry in the 1970s.
However, in 1976, Bill Gates created a revolution by recognising that software had separate value and in his famous "open letter to hobbyists" demanded that users should compensate developers for such software.
This insight gave rise to the proprietary software industry. These trends have several consequences. What do you have to trade to participate in a collaborative world?
The most frequent answer is intellectual property (IP). Although accurately valuing IP remains uncertain under current accounting rules, accountants are continuing to work on a way of giving it value.
Yet, IP clearly has significant value. For example, IBM has developed a system of exploiting its IP and consistently earns $1.2bn to $1.5bn a year by licensing it.
Corporate venturing has a critical role in this innovation ecosystem – corporate venture capitalists, in addition to their traditional roles of making investments, can add significant value by understanding and reporting on developments in the business ecosystem of the relevant market.
This mission had traditionally been focused on companies, but with the rise in importance of IP, their charter needs to be extended to understanding the IP landscape in the relevant market.
They can also assist their colleagues in finding ways to work with start-ups by helping them to understand the start-up culture, which is very different from larger companies.
Although corporate venturing has traditionally been focused on equity investments, some corporations are expanding this engagement through preferential access to corporate resources and products. Examples of this approach are the Microsoft BizSpark program and IBM’s Global Entrepreneur program.
In addition, corporations are using their IP as a currency to encourage collaboration – Marshall Phelps in his book Burning the Ships notes that after Microsoft shifted away from its "fortress" mentality, it rapidly entered into more than 500 technology sharing agreements.
The problem for many corporations is that IP has been viewed as a stick to beat competitors rather than a tool for collaboration.
In a collaborative innovation ecosystem, however, the corporation depends on other members of the ecosystem to assist in the development of new products and new versions of existing products.
In this eco-system, the reputation for being a good partner and collaborator is more important than cutting a penny off the price from a supplier.Collaboration is criti-cal to success.
However, it requires understanding about where you can add value and a willingness to experiment. For example, Google quickly learned that it would not be effective as a smartphone distributor with the problems of the Nexus One phone and turned to partners to distribute the smartphone.
Successful collaborations are difficultand require a different approach to the use of IP and the structuring of the legal agreements implementing the relationship. It is not enough to jump on the latest trends.
Open-source licensing is one of the most powerful trends in software development in the last decade, but "open sourcing" the Symbian smartphone operat-ing system was not enough to make it successful for Nokia. (Nokia recently took over Symbian Foundation because many of the participating companies had terminated their involvement due to the success of the Android operating system).
And the collaboration ecosystem demands con-sideration of new risks. For example, 12 lawsuits, ranging from patent to copyright, were filedin 2010 involving the Android operating system.
Successful innovation – and particularly the necessity of collaboration – also demands the right corporate business culture.
Many successful corporations have a business culture which is inward focused and rejects innovation "not invented here".
Consequently, they treat other members of the ecosystem as fungible suppliers rather than partners. This approach does not work in the new competitive landscape.
Microsoft has made one of the most dramatic changes in the last decade in this area – from a "fortress" protected by its market position and IP to a company seeking to use its IP as a bridge to collaboration.
This change was led by a new general counsel, Brad Smith, and his deputy general counsel (and vice-president), Marshall Phelps, and motivated in part by the government suits against Microsoft.
Microsoft took three major steps to implement its change of strategy. First, it eliminated certain harsh provisions in its licences and sought cross-licences with other companies.
Second, it hired Dan’l Lewin in Silicon Valley to engage with the start-up and venture capital community and to ensure Microsoft is sensitive to the start-up culture.
Third, it established the BizSpark programme in 2008 to provide access to Microsoft’s software development tools and platforms, and connections to BizSpark Network Partners.
However, each industry approaches these issues in a different manner. For example, the pharmaceutical sector has a long tradition of working with start-ups that create new drugs which are then commercialised by large pharmaceutical companies.
A recent article in Nature by Prof Robert Kneller found 42% of scientifically innovative drugs approved by the FDA in the past 10 years were initially developed by either biotechnology companies or universities.
Recently, James Greenwood, chief executive of BIO (an industry trade association), focused on the critical nature of IP and its exploitation in the development of the biotechnology industry in the US – the Chakrabarty decision in the Supreme Court, which dramatically expanded the scope of patent protection, and the Bayh-Dole Act, which permitted universities to own and licence patents developed under government grants.
He says these two changes in 1980 "set the stage for an explosion of innovation in the US that continues today". The public-private collaborations encouraged by the Bayh-Dole Act continue to accelerate innovation.
In 2009, 658 new commercial products were introduced based on academic inventions and universities successfully spun out 596 new companies.
Despite this impressive record, many analysts are concerned the pharmaceutical industry is not innovating effectively.
The US government is sufficiently concerned about this issue it recently established the US National Institutes of Health and is setting up a National Center for Advancing Translational Sciences to help drug design to bridge the gap between research and actual development of compounds and means of treatment. Many other governments are also involved in encouraging innovation.
Singapore developed its National Technology Plan in 1991 and has been using five-year plans to execute it. It is focusing on development of biomedical, digital media and clean technology industries. China is well known for its government support for the solar and wind industries.
Success in this new competitive environment requires an open business culture which encourages internal innovation and also works well with other companies in the collaborations which will be critical to success.
Corporations also need to rethink their use of IP and be prepared to use it as a bridge in collaborations rather than a stick for beating competitors.
Key changes to business environment
1 Competition is intense and from many (unexpected) sources
2 Open innovation is reality: much innovation occurs outside large companies
3 Innovation in products/services frequently requires collaboration of multiple parties
4 Innovation is global
5 Intellectual property is critical to participating in collaboration and ensuring a sustainable competitive advantage
Five rules for success in corporate innovation
1 Companies need to engage with the start-up community
2 Collaboration with other companies is essential to develop new markets/technology
3 Companies need to understand and effectively manage and exploit internal assets
4 An open culture is critical to success in the new collaboration environment
5 The use of intellectual property as a bridge rather than a stick is important