1. The Transformation of the IBM Corporation From Closed to Open Innovation Strategic Management of technology Professor: Deok-Joo Lee, April 14th 2010 Presented by Aekyung Kim

2. Introduction The IBM Corporation has made such a transformation! - Question. whether or how an established company might move from a Closed Innovation mind-set to an Open Innovation mind-set The IBM Corporation has made such a transformation! - shows that even large, successful organizations from the days of Closed Innovation can become far more open in their approach to innovation. (Nonetheless, despite the layoffs and the write-offs)

3. 1. Closed Innovation Success at IBM :1945-1980 World War2 ~ 1980(up until the PC industry revolution ) : IBM was far and away the most successful company. - exercised its leadership ( through the merits of the Closed Innovation model ) - research meant internal research (the path to market for the output of this research was to be entirely within the firm) - innovation philosophy was to separate its research from its development

4. 1945-1980(Continue…) Success of System 360 (1964) - A highly vertically integrated product (also, in almost every facet including marketing) -It resulted in an enormous success for IBM. $2.86 billion → $11 billion (sales) $364 million → $1.58 billion (net earnings) A golden age for IBM’s R&D - five Nobel Prizes, six National Medals of Science and patents - IBM managed its patents with the goal of protecting its discoveries from being used by other companies. A reliability of Customer

5. 2. Shifting Sands for IBM Innovation : 1980-1992 Key erosion factors began to appear 1. the growing acceptance of computer science  the knowledge landscape was transformed.  the ability of other companies to access important ideas and commercialize new technologies began to grow significantly.  DEC(Digital Equipment Corporation) – minicomputer 2. VC industry  The ARD(American Research and Development Corporation)’s investment in DEC and returns  the interest of other venture capitalists 3. The mobility of engineers and managers who were trained at IBM

6. 1980-1992(Continue…) The growing external knowledge base The burgeoning number of start-up companies The departure of many IBM employees The growing external knowledge base The burgeoning number of start-up companies The departure of many IBM employees began to seek greater relevance wanted to get the results of its research into the market faster began to seek greater relevance wanted to get the results of its research into the market faster It caused IBM to alter the way it funded its research activities!

7. 3. Joint Programs: A Funding Mechanism for Greater Relevance Joint Programs were funded out of R&D projects sponsored directly by individual IBM business groups. - to link the funding of a research project directly to a specific business group within IBM. - that business group actually paid for the research work.  researchers to take the problems of the business more the businesses not to treat research as a ‘free good’ But, rapidly getting research discoveries out of the lab and into IBM’s products remained a significant one for IBM.  tried to hire the best and the brightest Ph.D.’s available.  but these skills were often inflexible.

8. 4. IBM’s Near-Death Experience Competitive pressures - its high-end mainframe computers were serving a maturing market. - decline of its revenues  IBM was losing momentum in many areas of software. IBM recorded what was then the single largest quarterly and annual loss in U.S. in 1992 Lou Gerstner (1993) - chose not to break up IBM - needed a vision for the firm, a new logic - focus on IBM’s customers  value proposition

9. 4. IBM’s Near-Death Experience Meeting with a senior technical official at Citicorp  IBM’s research commitments, specialized resources, and human capital were misallocated.  need for technologies that could provide systems integration capabilities (for IBM’s customers, products, and services)

10. 5. The Internet for IBM : Chaos or Opportunity? What should IBM’s R&D strategy be with the Internet? notices of IBM 1. the core Internet technologies were not coming out of corporate R&D 2. Microsoft had been hiring people from universities and it was absorbing and commercializing the fruits of others’ research. 3. the universities themselves had no programs for the Internet. 4. Consulting firms offer to manage the IT function for the customer and they did little research on their own either.

11. a different approach to the Internet - worked to integrate these disparate elements into an effective solution.(with Citigroup) - worked to optimize its supply chain (with a paper company)  This reflected a powerful shift in mind-set within IBM. [ H/W, S/W  external technologies(, including those embodied in the Internet that were not created in any particular company’s lab.) ] A radically different business model - the value proposition to this customer - to deliver the best solution to its customer  no longer do everything itself (for the best solution to customer)

12. After that, how could IBM make money? - helping customers integrate computing technologies to achieve their business goals. - as part of its shifting business model. ( to charge for its management of customers’ equipment)

13. 6. Innovation for Sale : Unbundling the Value Chain A second transformation of its business model - storage division signed its first OEM agreement with Apple in 1993 (2.5-inch drive sale) - offer its MR heads to other disk-drive companies sacrifices some differentiation  enormous volumes

14. 7. Licensing Intellectual Property : Another Key Profit Booster for IBM Sale technology and IP to other companies - $1.9bullion in royalty payments for its IP in 2001 The difference in the CI and OI approaches to managing IP Possibilityway CIPa long-lived advantagefreedom of developer OIPattack of product market advantages compensation & monetize

15. 8. Learning form Customers : The “First of a Kind” Program FOAK: a contract between IBM’s research organization and a leading-edge IBM customer to solve a commercially important and conceptually interesting problem. - dedicate research staff (at the customer site) - the opportunity to fix any early problems - The customer get a solution (IBM get the right to use it) - own any IP - the chance to expose cutting-edge problems

16. Result - has altered the research contract - rewards ability to generate solutions to customers’ problems - research staff : knowledge brokers as well as knowledge generators - every research manager is responsible for an IBM business manager’s relationship with the corporate research organization This broadened the mind-set of IBM researchers

17. 9. Winning in a World of Open Innovation IBM’s transformation demonstrates that even very large, very successful companies can learn new tricks. - Focus on the value chain of its customers - Inject External technologies, selling its technologies (monitoring, detecting, enforcing and selling IBM’ IP)