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.
1. OECD, “Productivity Growth in Services,” in “OECD Factbook 2008: Economic, Environmental and Social Statistics” (Paris: OECD Publishing, 2008). See also A. Wölfl, “The Service Economy in OECD Countries: OECD/Centre d’études Prospectives et d’Informations Internationals (CEPII),” OECD Science Technology and Industry Working Papers, working paper 2005/3, OECD Publishing, Paris, February 11, 2005.
2. M.E. Porter, “Competitive Advantage: Creating and Sustaining Superior Performance” (New York: Free Press, 1985), 37.
3. Levitt’s famous comment is mentioned in C.M. Christensen, S. Cook and T. Hall, “Marketing Malpractice: The Cause and the Cure,” Harvard Business Review 83, no. 12 (December 2005):74-83. For Drucker’s quote, see P.F. Drucker, “Management: Tasks, Responsibilities, Practices” (Oxford, United Kingdom: Butterworth-Heinemann, 1999), 57.
4. For an introduction to co-creation, see C.K. Prahalad and V. Ramaswamy, “The Future of Competition: Co-Creating Unique Value with Customers” (Boston: Harvard Business School Press, 2004).
5. H.W. Chesbrough, “The Era of Open Innovation,” MIT Sloan Management Review 44, no. 3 (spring 2003):35-41 and H.W. Chesbrough, “Why Companies Should Have Open Business Models,” MIT Sloan Management Review 48, no. 2 (winter 2007): 22-28. See also H.W. Chesbrough, “Open Innovation: The New Imperative for Creating and Profiting from Technology” (Boston: Harvard Business School Press, 2003).
6. Eric von Hippel at MIT has done some fascinating work on “user toolkits.” The example of LEGO given here is quite consistent with this work. The basic concept is powerful and simple. Users are creative and innovative themselves. Organizations simply need to give them the tools to create exciting possibilities, and let the users loose to modify and recombine as they wish. This is a powerful way to tap into innovation possibilities that traditional market research might never uncover. A moment’s reflection, however, helps us realize that users cannot be simply turned loose; instead, they need to be directed to focus on particular areas within certain boundaries. This is where the toolkits come in. The toolkits package your possible service offerings into different items that users can “mix and match” as they wish. But, by confining the users to the items available, you can place some limits on what users do with these possibilities. Toolkits thus put certain boundary conditions on these variations, so that they remain feasible to produce and safe to consume. See E. von Hippel, “Perspective: User Toolkits for Innovation,” Journal of Product Innovation Management 18, no. 4 (2001): 247-257.
7. For more information on IBM’s savings from its research in services, see H. Chesbrough, “Open Services Innovation: Rethinking Your Business to Grow and Compete in a New Era” (San Francisco: Jossey-Bass, in press).
i. Porter’s value chain diagram differs somewhat from this simplified chart based on it. However, he includes the same sequence of processes — from left to right — of inbound logistics; operations; outbound logistics; marketing and sales; and service. For Porter’s actual value chain diagram, see Porter, “Competitive Advantage,” 37.