If you missed last week’s OpenSource.com webcast on open services innovation, be sure to watch the replay here. The webcast touched on the state of open innovation in the business world and was co-moderated by leading strategy and management author Gary Hamel and Polly LaBarre, author of Mavericks at Work: Why the Most Original Minds in Business Win, and featured Henry Chesbrough, executive director of the Center for Open Innovation at UC Berkeley’s Haas School of Business.
Chesbrough talked about openness and how Red Hat is one of the earliest successful cases on sharing and exchanging ideas openly and differentiating to build a competitive business model. Chesbrough notes that “Red Hat itself, I think, has really met the test of time as a business, using open source at its core, but nonetheless building a sustainable and profitable business.”
A full recap of the webcast is available on OpenSource.com, but an excerpt follows below.
LaBarre began by asking Chesbrough to address the fact that much of the emphasis in open innovation is about opening up to the world and not enough on looking inside our own organizations for the hidden genius within. What can we get from the crowd, and what can we give back to strengthen ecosystems?
Chesbrough started by mentioning the Motorola RAZR, a number one selling phone not that long ago. Fifty million were sold, sending Motorola to the top as a cell phone provider. He described the “commodity trap,” which in the case of Motorola, was the KRAZR, which was not the hit that its predecessor was, leaving the door open for Nokia phones to overtake Motorola as number one, and new entrants like Samsung and HTC to move in. Motorola has now fallen to the number seven handset manufacturer in only a few years.
It’s difficult to sustain differentiation when you’re only making a product. Nokia later fell into its own commodity trap, not just from the lack of ability to innovate, but because the whole basis of the industry has changed from desire for product attributes to desire for services and applications creating new experiences. While they still lead in units, Nokia does not still lead in profits.
To escape the commodity trap, Chesbrough says that you must:
- Wrap services around your products
- Turn products into solutions
- Co-create innovations with your customers
- Use openness to get more from specialization
- Build platforms to attract others to add to your solutions.
Paul Horn, head of IBM’s research division, said in 2004 that his biggest problem was that more than half of IBM’s revenue was coming from global services. But almost nobody was working on products related to services organization. He wondered how to sustain an industrial research organization that wasn’t relevant to more than half of the company’s business?
Chesbrough said that this was when Horn realized that spending time thinking about innovation in products and technologies was not the same as talking about innovation in services.
In Michael Porter’s value chain, services were wedged as a small piece at the end of the chain–as a last thing you do to finish off. Chesbrough reasons that we need to have a services value web with the customer experience at the center surrounded by experiences with partners and third parties in the environment. Services should be the central concern.
Centering on the customer results in several changes. One is the utilization differential. Chesbrough gives the example of a car that drives 12,000 miles/year, averaging to 400 hours/year. Your utilization of that car is 4.6%. If that were a service, you have an untapped 95.4% that could be shared. Some of the options that historically worked on that 95.4% were taxis and rental cars. Today there are services like ZipCar and Daimler’s new Car2Go service, similar to ZipCar, but without fixed stations for pick up and drop off, no commitments, deposits, or monthly fees. This is transportation reimagined from the services-centric point of view.
Listen to the webcast for his further examples in UPS and Amazon.com.
So how do you sustain differentiation in services? Through service platforms, with a multi-sided market. In the example of Amazon, it’s self-sustaining. The more third parties you attract to your site to sell, the more merchandise you have, which makes you more appealing for even more third parties, and so on. Your company’s technologies also become the basis for others’ technologies and innovation, giving you the opportunity to shape the direction of evolution.
“Those of us who do the best job of using external ideas and technologies in our own business may be able to go farther and faster than those who try to do it all themselves and lock it all up,” Chesbrough said.
In another example, Chesbrough demonstrated that even in a service as commodity-like a restaurant, you can still build a platform. He showed a photo of a white foam on an equally white cube of liquid nitrogen. It’s a dish at elBulli, an Iberian restaurant, and part of a movement known as molecular gastronomy, which originated with Herve This, a French physical chemist. The proprietor of elBulli worked in This’ lab, and decided to reduce taste sensations to the molecular level, resulting in new flavors, resulting in the creation of elBulli. He has now launched business partnerships with other companies. His brand became the basis of a platform of other food experiences, ranging from oils and coffee to even airline food. He’s careful not to overextend or dilute the elBulli brand by working with only one partner in a given area.
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