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Copied summary from: http://business.financialpost.com/2011/09/07/strategy-innovating-with-services/

In this difficult economic climate, most executives are looking to improve competitiveness and profitability by becoming more innovative.  In most cases, their attention has been focused towards the product and operational areas of the business.  However, successful product and operational innovation may still not be a long term panacea.   Mega trends like rapid technology diffusion, globalization and falling industry barriers to entry will continue to drive product commoditization and shrinking margins. 

One way to outflank competition, meet increasing customer demands and improve revenues is to target innovation efforts against the services side of the business.  In essence, product suppliers would reinvent themselves as service companies, offering complementary services, support and tools that satisfy a wider range of customer needs and differentiate their firms.  Granted this is not a new idea.  Whats really interesting is how the approach is being implemented.

One powerful strategy borrowed from cutting-edge R&D firms is to move to an open services model, whereby a company offers complementary services, delivered internally or via external providers, through an open and collaborative framework.  In particular, outside firms are encouraged to proffer their services through access to product technology, integration into the product firm’s operational infrastructure and through joint marketing and channel management programs.  Many industry leaders have successfully operationalized this model including Apple, Xerox, IBM, 3M and Amazon.

There is now a critical mass of best practices around making an innovation in services strategy work.   Open  innovation pioneer, Henry Chesbrough, recently summarized some of these in an interview in strategy+business magazine.

!Focus on platforms
A powerful way of catalyzing innovation in services is by leveraging a powerful yet open platform. A platform is a foundational product (or products) which can support an ecosystem of complementary services, support and process methodologies.   One of the most successful examples of a platform is the iPhone.  The iPhone owes much of its success to the services that accompany the product, whether these are delivered internally (e.g., iTunes) or externally through thousands of externally developed applications, crowdsourced technical support and functional add-ons.

!Be open…to a point
Many successful platforms such as GE (infrastructure financing), General  Motors (OnStar information services) and Xerox (Managed Print Solutions) mix internal and external services, products and partners within one ecosystem.  A hybrid approach is the ideal strategy for most firms as it leads to economies of specialization i.e. leveraging the optimal mix of services, expertise and resources. Despite apparent successes, we have seen some companies struggle with implementing and managing this strategy.  For example, organizations need to be collaborative by nature and must be willing to expose  their product roadmap, delivery model and their brand.

!Understand the full gamut of needs
In our experience, launching innovative services requires that firms possess a deep understanding of customer purchase habits, supply chain dynamics as well as their core competencies.  Amazon is a good example of a firm that uses consumer data to catalyze innovation in services.  The company has leveraged a deep understanding of consumer  needs across the full shopping, purchase and delivery spectrum to deploy innovative services like customer reviews, 3rd party book selling and referral tools.  These combine to enrich the shopping experience, differentiate the offering and generate incremental revenue.

!Every industry can be “opened”
Many “big iron” manufacturers, not traditionally viewed as service businesses, can benefit from a service innovation strategy.  Case in point, the Taiwan Semiconductor Manufacturing Company.  In the mid 1980s, TSMC began to decouple the design of chips from the manufacturing of chips creating an entirely new services business model called a foundry. TSMC’s foundry leverages  an open services model.  The company can manufacture chip designs from fab-less chip designers, provide design tools, testing and process technologies or co-create chips with partners. As a result of this innovation model, TSMC is now one of the World’s leading semiconductor firms.

Fast forward 3-5 years, it is likely most leading product companies – save the lowest cost, highest volume players – will have a robust open services offering.  Their challenge will remain making it all work.

The new book asks us to shift our thinking even further away from the R&D labs. The most important aspect of this is the need to rethink business innovation from a service perspective, one that has its focus on “creating the customer’s experience”.

The main messages are:

Move the organization even further away from the linear process that has dominated much of the 20th century thinking (think Porter’s value chain 1985).
Make more use of the ‘open’ iterative process, be more multi-dimensional in collaboration, and integrate the customer more centrally into the ‘web’ of collaborators.
Invention from the R&D bench led to market ‘push’ and an attempt to justify corporate thinking by imposing it on the market and onto the consumers. We have seen some really dramatic shifts in research techniques to know more of what ‘pulls’ and ‘connects’ with consumers – open innovation helps in delivering on this understanding.
Focus on the consumers unmet, unarticulated or required needs by making customers central in the web of co-creators and co-creation activities.
For most organizations this will be a strategically defining decision-step, fraught with many imponderables for creating and managing services in a  more open and engaged framework where customers have a more central role.

!The four fundamentals driving Open Services Innovation

Chesbrough frames his thinking around four concepts that he suggests will accelerate the movement to more open (collaborative) service innovation.

The four foundational concepts are bold and certainly radical in their strategic implications, although on first glance they may not seem that way.

* Think of your business as an open services business in order to create and sustain differentiation in a commodity trap world.
* Invite customers to co-create innovation to generate (new) experiences they will value and reward.
* Use Open Service Innovation to help you turn your business into a platform for others to build on.
* Transform your business model with Open Services Innovation to profit from building a platform business model so you can gain from others’ innovation activities as well.

!The ‘traps’ and dangers of product-led innovation

Chesbrough argues there are many tensions that need to be reduced and addressed.

* The ‘best practices’ movement has advanced innovation capability so that it is now more difficult to differentiate, leading more and more companies into a commoditization trap.
* Today customers are seeking more diversity and differentiated experiences and because of this the need for customization is clashing with standardization.
* Equally customers are looking to become more engaged and involved in their products and services.
* Multiple partners organizations are seeking more involvement in a ‘joint’ innovation process and are becoming critical contributors of diverse ideas and solutions to the product and service design process.
* Acknowledging these ‘tensions’ allows for more knowledge to flow, more participation, more experiments in parallel, and new ways of using and combining a broader community of knowledge.

Chesbrough proposes that companies develop their own Open Innovation Business Platform Model for others to connect and build upon – this is the critical aspect of this book and it grabs my attention. The suggestion is you can construct, manage and innovate together on this ‘extended’ collaborative platform.

!Implications of Chesbrough’s Open Services Innovation

When you have a movement like ‘open innovation’ you run the danger of pushing the concept too far or rationalising other movements into your own framework to readily.  Chesbrough has probably done that here.
There are many ‘open’ questions still to be addressed for open innovation to be fully embedded even today, a good seven years since it was first proposed.
It might have been healthier for Professor Chesbrough to address these legacy issues from his knowledge, understanding and exposure rather than pushing the ‘open’ paradigm even further right now.
In my view there are just too many ‘open questions’ from this book that will fuel resistance to the proposed changes and inhibit the momentum needed to make them work.
Let me give you an example. The four foundation steps in the way the book outlines them as concepts leaves an awful lot of white space between them; I mean an awful lot of understanding and knowledge to bridge. Many of the leading edge concepts introduced here are somewhat ‘raced over’ and there is a  lack a real depth that seemingly will be left to others to fill in.
It can be argued that this is a book of ideas, concepts, principles, frames and emerging themes. I can accept any new movement has to be painted in broad brush strokes and often left to others to fill in the blanks, but this can slow the momentum down before the detail is filled in.
The success of this book will be in the adoption, but this is a foundational framework that requires thinking through. It’s a long road to action from there. Those that already are on the journey will have first mover advantage.
Whatever the outcome, this  is a book I can only recommend as an essential read. You might end up with more questions than answers, but heck, that’s what we have consultants and professors around for, isn’t it? Chesbrough has certainly raised the bar on service innovation.
Sun, 06 Nov 2011 20:39:47 GMT
Sun, 06 Nov 2011 20:39:47 GMT