[MUSIC] Welcome to module two, in this module we're going to establish the need for open innovation. At Garwood Center for Corporate Innovation, where we study and do a lot of research on the various problems that companies are facing, and how open innovation is relevant. We have identified some problems, and they all have to do with the resource constraints and comparative forces that exist in the world today. So there's seven problems that we address, I'll go one by one very quickly. The first one is as companies mature, innovation runs. Innovation doesn't happen as fast as it would when you're a start-up, when companies become elephants they cannot take a u-turn. They cease to be leverage and what they need is to another life, they need innovation. Inside the companies to give both to new ideas, new and establish new markets. That's one problem that we cried in grasp at Brooklyn to see what will be the best practices in bringing in more innovative processes and large companies that get stock. The second problem is in today's landscape the product life cycles are shortening, shortening exponentially that presents a second challenge. How do you deal with that? And we figure that open integration is the best way like we had illustrated in the first module. That how we can get that speed so that we can increase this problem shop product life cycles and speed to market. The third problem that were seeing today is the balance sheet are changing. When I was in school back in the 1970s almost 82% of the assets on the balance sheet were physical assets like factories, tables, and chairs. But today the world is far different, it's just the opposite. 80% of the assets are knowledge assets, these are IPs. The problem with IP is that they wrap the value of assets very fast. A molecule that's invented today by a bio tech company may worth millions today and tomorrow. It could be worth zero, because another scientist somewhere Bangalore have invented a new molecule that's much better. So, knowledge assets depreciate class, unlike physical assets, this is the third challenge and open innovation, again, plays a very important role. The food problem that we are seeing, this was a study done by is a 47 year study about all of the publicly created companies. That showed that the return on assets has declining by 75% and with no end in sight. Which means that the stewardship of assets, the return on assets, the stewardship of assets that was at one time created a lot of value is not creating that value anymore. Actually the value that the stockholder is deriving is from this return an equity is basically what that means is we are choosing a balance sheet but more and more debt. Less equity, more debt It’s giving us higher propensity for risk and creating bubbles that we're noticing in today’s economies, that’s the other challenge. The fifth problem that we're also noticing is what we call commodity crap in the old world. We used to make a lot of money based on R&D, this was the closed innovation days. Closed innovation helped us to got the knowledge and because other people had no privilege of borrowing it so we made a lot of money. But the internet and globalization, and cross pollination of employees moving from over place to the other. And working for different companies, knowledge is no longer held in fortresses. It is free, knowledge wants to be free. So as a result of globalization and speed-to-market and short product life cycles, that revenue that we once made is no longer as lofty, it's reclaimed. That is what I call A, that I labeled right here, and also the cost of innovation is up. Increasing cost of renovation, that's because the product life cycles are short. So which if you want to come up with a new product, you need to go back and create a new one and that costs money. So you have A and B, A is due to speed to market and global competition and B, due to increasing cost of innovation. This problem of the commodity trap pervades all companies who are in the product business. A quick story about Motorola's Razr, when the first product came out, they sold 40 million of these things. And Motorola was so happy with the results, it created a much cooler, much sexier product the following year called Quasar. But no one bought that product because Nokia became the new number one and Motorola became number ten. Because the product that Motorola was offering became so irrelevant because Nokia captured the value by selling it to the brilliant people in China and the brilliant people in India. So that is called the commodity fact if you're in the commodity business this is a real problem that you deal with. And this is for this reason we are exporting a lot of jobs to other countries. Problem six, as you can see on the slide we have started, in the past, where we level 1, and now in today's landscape at level five. In the older days, we've made money by making the product, selling the product and shipping the product and very high margins there. But as products became more complexed, you go to level five you can see that now the business model requires no assets. We use other people assets in order to derive value. This is good and bad, it's good because things are becoming more efficient all the assets have been utilized but it also means that those high margins. Have gone away, and now we're in the low margin world and we need to figure out how we sustain our businesses. And this is where open innovation is needed. In the next slide, I want to talk about the last problem. It has to do with addressing the needs of the many that live in the world. Companies make products for rich people. We make products for the 1.5 billion rich and not for the 5.5 billion poor. You need innovation to create high value at low cost, because it's easy to create projects for the rich people, high value at high cost. And today's business models need to be relevant to the 5.5 billion people who live in emerging economies. Because the growth of those economies is 5% was only 2.5% in the western economy so that's a 1.5 trillion opportunity and open innovation is essential for this process.
