PASSAGE TWO

Berkeley seems like a fitting place to find the godfather of the openinnovation movement basking in glory. The Californian village was, after all, at the very heart of the anti-establishment movement of the 1960s and has spawned plenty of radical thinkers. One of them, Henry Chesbrough, a business professor at the University of California at Berkeley, observes with a smile that “this is the 40th anniversary of the Summer of Love.”

Mr. Chesbrough's two books “Open Innovation” and “Open Business Models” have popularised the notion of looking for bright ideas outside of an organisation. As the concept of open innovation has become ever more fashionable, the corporate R&D lab has become decreasingly relevant. Most ideas don't come from there.

To see why travel to Cincinnati, Ohio—which is about as far removed culturally from Berkeley as one can get in America. The conservative midwestern city is home to P&G, historically one of the most traditional firms in America. For decades, the company that brought the world Ivory soap, Crest toothpaste and Ariel detergent had a closed innovation process, centred around its own secretive R&D operations.

No longer. P&G has radically altered the way it comes up with new ideas and products. It now welcomes and works with universities, suppliers and outside inventors. It also offers them a share in the rewards. In less than a decade, P&G has increased the proportion of new-product ideas originating from outside of the firm from less than a fifth to around half. That has boosted innovation and, says its boss, Mr Lafley, is the main reason why P&G has been able to grow at 6% a year between 2001 and 2006, tripling annual profits to $8.6 billion. The company now has a market capitalization of over $200 billion. IBM is another iconic firm that has jumped on the open-innovation bandwagon. The once-secretive company has done a sharp U-turn and embraced Linux, an open-source software language.

IBM now gushes about being part of the “open-innovation community”, yielding hundreds of software patents to the “creative commons” rather than registering them for itself. However, it also continues to take out patents at a record pace in other areas, such as advanced materials, and in the process racks up some $1 billion a year in licensing fees.

Since an army of programmers around the world work on developing Linux essentially at no cost, IBM now has an extremely cheap and robust operating system. It makes money by providing its clients with services that support the use of Linux—and charging them for it. Using opensource software saves IBM a whopping $400m a year, according to Paul Horn, until recently the firm's head of research. The company is so committed to openness that it now carries out occasional “online jam sessions” during which tens of thousands of its employees exchange ideas in a mass form of brainstorming.

Mr Chesbrough, of course, heartily approves. He gives dozens of other examples of firms doing similar things, ranging from Clorax, a household products firm to Air Products, an industrial gases company. Mr Chesbrough reckons that “IBM and P&G have timed their shift to a highvolume open-business model very well” and that if their competitors do not do the same they will be in trouble.

“Summer of Love” is probably ________.

According to the passage, the annual profits of P&G in 2001 was about ________.

IBM now gushes about being part of the “open-innovation community” in that ________.

IBM could provide its clients with cheap operating system because ________.

According to the last paragraph, if their competitors do not do the same they will be in trouble because ________.