Darden Prof: Tap Outside Resources to Rev Your Innovation Engine

Professor Michael Lenox is the executive director of the Batten Institute for Entrepreneurship and Innovation at the University of Virginia's Darden School of Business. Professor Lenox concentrates on two main areas: technology strategy and the interface of business strategy and public policy. In today's Q&A, we'll discuss how large companies can rev up their innovation engines by tapping into resources outside of their corporate boundaries.

BNET: How do companies take advantage of what you call "extramural knowledge" to spur innovation?

Lenox: If you look at industrial research and development thirty years ago, the dominant model was that you put a bunch of smart people in a building up on a hill and a bunch of great ideas spout out, whether it be from Xerox PARC (Palo Alto Research Center) or Bell Labs. Where we've moved over the last thirty years is to a more open innovation model, best represented by firms like Cisco and Intel. They're out there forming relationships with competitors, partnering with universities, licensing to bring technology in. There's a much more collaborative kind of innovation taking place, rather than the old mode of, "How much money should we allocate to our R&D lab?"

This opens up a bunch of interesting questions about how firms get knowledge from external sources and how you structure those relationships. I did some work with General Motors a few years ago where they were looking at fuel cell development. It was no longer just a question of how much to allocate to their own lab: They were wondering if they should license from a university, partner with Toyota, invest in a new start-up -- the answer is it could have been any or all of the above.

BNET: How can a company figure out when it should look outside and when it should focus more on its internal innovation abilities?

Lenox: I've done some deep dives into corporate venture capital, which is when companies take a minority equity stake in a new venture in order to get a window on new technologies. Companies scan the environment and realize they are unable to innovate on every potential path or technology trajectory. They use these kinds of relationships not only to help the venture but also to help their own internal efforts. There are some challenges, as you can imagine, since the start-ups are worried about having their great ideas stolen by these larger players. There is an interesting dance that happens between matching the needs of the venture -- which is looking for not only financial support but also help with marketing and maybe also in manufacturing and operations from their "corporate sponsor." When a corporation invests in complementary technologies, these types of relationships seem to work better than when they are pure substitutes. It works better when the corporate partner is unlikely to ever compete with the start-up in that area of technology.

We also had some interesting findings in terms of the strength of intellectual property protections within a certain industry. In pharmaceuticals, there are very strong intellectual property rights. If you get a patent on a certain compound, you can really defend that in a court of law. On the other hand, you have computer software. You can get patents, but they are notoriously difficult to enforce because of the ambiguities around the boundaries of the software platform. What we found is that you see more corporate venture capital in the case of the weaker IP. The logic we came to was that in the areas of stronger IP, like the pharmaceutical world, the information is out there [via the patent filings] and there's not necessarily much knowledge to be gained by partnering with the start-up, at least in terms of gaining a window on technology. In the software case, there is often secrecy around what they are doing because of the concerns about [the enforceability of] intellectual property. Allowing the corporate VC investor in gives them the ability to ierce the veil of secrecy and learn more than they would be able to observe by being an independent party.

To bring this all together, what I am working on today with a variety of different colleagues is thinking through that GM question. Given all of those different types of relationships you can establish with different types of players, how do you manage that? At the end of the day, it comes down to the strength of intellectual property protection -- also the role and complementary capabilities of the players. What do I bring to the table? Do I have manufacturing or sales force capabilities or the like that allows me to partner with someone? Then you make trade-offs and figure out the balance between the internal and external mechanisms available to you.