In recent years, open innovation has been changing the way many companies think about developing products. But open innovation can — and should — apply to services, too.
Back in 2004, I sat in Paul Horn’s office at IBM. Horn was at the time IBM’s senior vice president of research, in charge of IBM’s 3,000 research staff. We had a wonderful conversation about innovation, and the many successes IBM had obtained from its research activities. At the end of our time, I asked Horn a final question: What is your biggest problem today?
Horn told me that his biggest problem was that his research activities were geared to support a company that made products: computer systems, servers, mainframes and software. But most of IBM’s revenues were coming from services, not from its products. “I can’t sustain a significant research activity at IBM if our research is not relevant to more than half of the company’s revenues going forward,” Horn stated.
The Leading Question
How does open innovation apply to service businesses?
- Many open innovation concepts apply readily to services.
- One way companies can move toward open innovation in services is by working closely with customers to develop new solutions.
- Product-oriented companies face organizational challenges in moving to a greater emphasis on services.
The challenge Horn articulated in that conversation was not unique to IBM. In fact, the challenge of how to innovate in services is one that faces not just individual companies but also entire countries. The world’s developed economies are increasingly oriented around services: Services comprise more than 70% of aggregate gross domestic product and employment in the Organization for Economic Cooperation and Development countries.1 In countries such as the United States, products represent a smaller and smaller share of the economic pie — particularly as China and other lower-wage countries rise in manufacturing. An important problem for advanced economies is that we know much less about how to innovate in services than about how to develop new products and technologies.
Rethinking Business — From a Service Perspective
Consider the classic formulation of a business as a value chain of economic activities that add value to a product. Michael Porter’s well-known book Competitive Advantage includes an illustration of this type of value chain.2 In Porter’s depiction of a value chain, inputs enter the business and are transformed into outputs through a series of processes.