The Power of Open Innovation
The rules of the game are being rewritten. From international giants to SMEs, companies are tearing down R&D barriers, and ushering in a new era of openness.
The Power of Open InnovationBy Ching-Hsuan Huang
From CommonWealth Magazine (vol. 382 )
At the end of August, High Tech Computer Inc. (HTC) introduced its 3.5G HTC Touch, with great fanfare, in Japan’s notoriously closed handset market. Nicknamed the “Elf” in the Taiwanese market, the Touch is considered to be the closest rival of Apple’s iPhone.
HTC, which earns its shareholders more than any other domestic company, did not take its big step into Japan’s market on its own. It joined with that country’s biggest telecom NTT DoCoMo, which boasts more than 50 million mobile phone customers.
When NTT DoCoMo selected the Touch, designed and manufactured in-house by HTC, it also for the first time opted for a consumer-oriented PDA handset featuring a Windows operating platform.
Proctor & Gamble, which ranked sixth in this year’s Business Week survey of the World’s Most Innovative Companies, now has 35 percent of its new products originating from outside sources.
IBM, the global leader in patent applications for the past 12 years, released 500 of its software patents to software developers or companies around the world in 2005. In doing so it strengthened its creative energy in management, e-commerce, and image processing.
Independent Innovation Is a Thing of the Past
The trend is clear. Companies as diverse as big multinationals, hot mobile telecoms and traditional small- and medium-sized enterprises (SMEs) are all breaking down corporate R&D barriers and opening up creative opportunities.
This new wave is still expanding and rewriting the rules of the game, and has influenced shifting corporate fortunes. It has augured in a new era that will challenge how open companies really are.
In CommonWealth Magazine’s 2007 Most Admired Company Survey(Table 2), “innovation” and “vision” were the qualities most highly valued by enterprises and experts, possibly because these are characteristics often found lacking in Taiwanese companies. Taiwan’s leading enterprises regularly receive their lowest scores in the annual survey in the area of “innovation.”
As products become more complicated and life cycles grow shorter, companies face rising innovation and R&D costs, and growing pressure to deliver.
And if they only devote their own manpower and financial resources to R&D, they won’t be able to keep up with today’s short life cycles for new products.
Small wonder that Business Week declared: “Innovate quickly or die.” And now, more than ever, new concepts and valuable knowledge are coming from all around the globe, making it difficult for any single company to corner the market on the talent needed for future innovation.
In a recent interview with CommonWealth Magazine, Henry Chesbrough, executive director of the Center for Open Innovation at University of California, Berkeley’s Haas School of Business, asserted that nowadays, no single company can go it alone in research and development. Chesbrough’s research on open innovation and open operations models has resonated throughout one of the world’s innovation incubators, Silicon Valley.
This year, CommonWealth Magazine’s Most Admired Company Survey addressed “open innovation” for the first time. The results revealed that of the 24 sectors surveyed, the computer industry scored the highest (Table 1) , echoing Chesbrough’s analysis.
Taiwan’s Industrial Technology Research Institute (ITRI), which is closely tied to the domestic technology sector, has embraced and promoted an Open Laboratory Program to encourage open innovation in Taiwan.
From its inception, ITRI has shouldered the responsibility of taking on the country’s biggest technological R&D missions, and “openness” has always been a core spirit and creative value. It has sold over 1,000 patents to domestic Taiwanese companies since 2003 for hundreds of millions of Taiwan dollars, but the value of the innovations they have led to in the private sector has been worth many times that amount.
Open Approach 1: Innovation-seeking Radar
Even traditional SMEs can solicit outside help to increase the depth and breadth of their technical knowledge at an accelerated pace. The key to success is whether these companies have made it a top priority to seek out new concepts and discoveries and quickly adopted them.
Taichung-based Hiwin Technologies Corp., Taiwan’s largest machine parts manufacturer, specializes in ballscrews and linear guideways that are used in high-precision instruments found in the semiconductor, flat panel, and aerospace sectors, among others. Its customers include Samsung Electronics, Japanese LCD test equipment maker Micronics Japan Corp. and precision machining center manufacturer Heller Machine Tools Limited.
Hiwin realizes it has limitations as a small company and cannot rely exclusively on its own resources to grow. It has cooperation agreements with 20 universities, all geared to encouraging innovation and technological breakthroughs.
“But even that’s not enough. When we have the chance, we set up cooperative arrangements internationally,” Hiwin Chairman Eric Y.T. Chuo says. “If you don’t look at yourself with a world view, you have no chance of survival.”
Wherever Chuo goes, he keeps an eye out for cutting-edge technologies. In 1999, Hiwin took over a Samsung R&D center at Moscow State University, where over 20 professors are studying control theory and other basic research topics for his company.
“Otherwise, how can we say we want to be No. 1 in the world?” muses Chuo, whose company has lofty ambitions due to its outside R&D support, despite sales of only NT$6 billion last year. “It’s not enough for our products to be the best in the world. We have already set a sales target of NT$30-40 billion without having to acquire other companies.”
Open Approach 2: Integrated Platform, Added Value
The concept of openness not only involves mining sources of corporate innovation. Even more importantly, companies can leverage open approaches to enhance their own value positioning.
The definition of “value” in a supply chain is constantly in flux. Companies that defend a fixed position are eventually left by the wayside, but with a more inclusive approach, they can call on different resources to improve the value of their positioning. One such enterprise is Makalot Industrial Co., Ltd.
In business for 17 years, Makalot is Taiwan’s youngest clothing manufacturer but has ranked No. 1 among Taiwan’s Most Admired Companies in the textile industry for two years running. Its main markets are leisure and sportswear, with Target, Gap and Wal-Mart among its key customers.
Many of Makalot’s researchers and designers now spend an increasing amount of time at fashion shows in Paris and New York, a key component of its more open approach to accepting new concepts.
But Makalot is also taking popular fashion trends driven by top brands — such as metallic ornamentation and sequins — and passing them along to upstream fabric and material suppliers as projects that can be developed jointly to save on R&D costs.
In the past, brands or wholesalers have served as the “integrators” in the industry, taking charge of product planning and design and tightly controlling the power to dictate purchases of upstream raw materials.
“Now we are the integrators,” says Makalot chairman Frank Chou, describing how his company’s position in the industry’s supply chain has changed. With textile contractors besieged by falling prices and shrinking distribution channels, Makalot was compelled to reposition itself and create new added value.
To develop its open platform, Makalot strengthened its design capability and developed new business modeling software, which allows customers and suppliers to immediately decide how much to produce, based on market data, and helps expedite delivery of goods to the markets that most need them.
This open collaboration approach enabled Taiwan’s youngest clothing manufacturer to become its biggest, with sales in 2006 of NT$12.56 billion.
Open Approach 3: Collectively Share Risk, Create Value
Every industry has its own supply chain and ecosystem. Companies must have a firm grasp of their unique abilities and understand how to open up and choose the right partners to create value if they want to be a player in the supply chain.
“Enterprises must find a unique position for themselves in an ecosystem,” says Yi-chia Chiu, an associate professor in National Chung Hsing University’s Department of Business Administration. “Opening up doesn’t just mean improving innovation, it’s also a type of strategic thinking, as demonstrated by High Tech Computer.”
Celebrating its 10th anniversary this year, HTC was somewhat of a Johnny-come-lately to the mobile phone industry, but has generated rapid growth, with a 44 percent jump in sales in 2006 just the latest example. HTC has also ranked in the top 10 in CommonWealth Magazine’s Most Admired Company Survey for three consecutive years, finishing 10th in 2007.
HTC’s main product line consists of mobile-based smart devices, a relatively limited market, but the company has been able to expand rapidly because of its partnerships with a major software provider – Microsoft – and powerful customers – big telecommunication providers – to create a tight symbiotic system.
To get its software in mobile phones, Microsoft was desperately looking for a partner to compete with Nokia’s Symbian operating platform, which at one point was installed in three-quarters of all handsets. Around the same time, in 2002, HTC found itself without any OEM mobile phone orders from the big brands, like Nokia and Motorola. It was the world’s biggest PDA design OEM manufacturer, however, so it capitalized on its PDA R&D capability, decided to take a shot with Microsoft’s operating system, and developed the world’s first PDA handset driven by Windows.
Then, with Microsoft’s help, HTC approached a number of big telecommunication companies and offered them direct customized services. Today, HTC serves dozens of telecom companies in many countries, avoiding the cutthroat pricing competition faced by Hewlett-Packard, Dell and Taiwan’s OEMs. By providing customized services and cutting-edge products, HTC has generated gross margins of nearly 40 percent and is expected to report net income in 2007 that is five times its registered capital.
In a ceremony in September marking HTC’s 10th anniversary, Chairman Peter Chou described the company as Microsoft’s partner in product creation, whose cooperative relationship is not limited to R&D, but also includes marketing and sales. Attaching itself to the wings of a giant, HTC has been able to fly farther and faster than it ever could have on its own.
In today’s competitive world, benchmark companies differ from average enterprises in that their strategic planning focuses on leading their industry rather than mere survival, because they want to stay ahead of trends and trump the competition.
Continuous innovation is the key to staying on top, and ahead of the game.
Translated from the Chinese by Luke Sabatier