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Services Science:An Open Innovation perspective on studying innovation in services

Henry ChesbroughExecutive Director

Center for Open Innovation, IMIOHaas School of Business

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The Current Paradigm: A Closed Innovation System

ResearchResearchInvestigationsInvestigations

DevelopmentDevelopment New ProductsNew Products/Services/Services

TheMarket

Science&

TechnologyBase

R D

3

CurrentMarket

InternalTechnology

Base

R D

The Open Innovation Paradigm

Technology Insourcing

New Market

Technology Spin-offs

ExternalTechnology

Base

Other Firm’s MarketLicensing

Closed innovation

Our current market

Our new market

Other firm´s market

Open innovation

External technology insourcing

Internal technology base

External technology base

Stolen with pride from Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from Industrial R&D, 10th Annual Innovation Convergence, Minneapolis Sept 27, 2004

Internal/external venture handling

Licence, spin out, divest

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IBM’s Business Model, BeforeV

alue

-Add

ed A

ctiv

ities

Materials

Chips, devices

Computers

Operating Systems

Applications

Productivity SW

Atoms

Solutions

Value Chain

All IBM – pre 1993

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IBM’s Business Model - AfterV

alue

-Add

ed A

ctiv

ities

Materials

Chips, devices

Computers

Operating Systems

Applications

Productivity SW

IBM Chain OEM Market

Materials

Chips, devices

Computers

Operating Systems

Applications

Productivity SW

Integration

Atoms

Solutions Other Integrators

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CurrentMarket

InternalTechnology

Base

R D

IBM & Open Innovation

Technology Insourcing

New Market

ExternalTechnology

Base

Other Firm’s Market

Java,Linux

Sun, and others’ eqmt

$1.9 B licensing,OEM for semi co’sODM for others

Global Svcs

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CurrentMarket

R D

Is this just for High Tech?Procter &Gamble

New Market

“Use it or Lose it”

ExternalTechnology

Base

Other Firm’s Market

Technology Scouts

InternalTechnology

Base

VentureAcquisitions“Spinbrush”

LargeAcquisitions“L’Oreal”

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CurrentMarket

InternalTechnology

Base

R D

Intermediaries & Open Innovation

Technology Insourcing

New Market

NVPLLC: spinoffs

ExternalTechnology

Base

Other Firm’s MarketIP Value - licensing

InnoCentiveNineSigmaYet2.com

InvestmentBanks

Sequoia/Cisco

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The State of Play in Services Industries Today

In many leading companies, services are more than half of the company’s revenue, and usually the fastest growing part

IBM, GE, Xerox, GM Yet companies who sell services innovation offerings to corporate

and government clients admit they lack a powerful conceptual model underneath their offerings

“Best practices”, separated into vertical markets

The shoemaker’s children are barefoot Paul Horn’s problem at IBM circa 2002: $6 billion of R&D, but little

of that money is advancing the services portion of IBM’s business

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The Impact of Academic Research on Industrial Performance

National Academy of Engineering Study (2003): 5 sectorsNetworking and Communications

Medical Devices and Equipment

Aerospace

Financial Services

Transportation

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The Impact of Academic Research on Industrial Performance

National Academy of Engineering Study (2003): 5 sectorsNetworking and Communications

Medical Devices and Equipment

Aerospace

Financial Services

Transportation Found significant impact from academia on the first three, and much more

limited impact on the last two sectors“…the academic research enterprise has not focused on or been organized to meet

the needs of service businesses” (p.8) DARPA gives more to consultants than academia in services NSF funding structure badly lags industry evolution Yet long term university-sited research is vital to long term industrial

innovation performance

Pro

duct

Ser

vic

e

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The Productivity Paradox: Eric Brynjolfsson

“We see the benefit of IT investment everywhere, except in the statistics”: Robert Solow

Brynjolfsson’s Research Program resolved the productivity paradoxPartly a measurement problem

Partly a management problem: Companies greatly improved their productivity with IT spending, but only when they deployed new business processes to exploit that IT investment

(adding IT investment to legacy processes did NOT increase productivity) Research Implication: one cannot understand productivity increase

without developing a deep understanding of the underlying business processes

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A Stylized View of Services Practice Today

Government Education Health Care TransportFinancial

Services

• Deep domain expertise• But little or no sharing across domains

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A Stylized View of Computer Architecture Today

Chips, Components

Systems and Peripherals

Operating Systems, Networking

Middleware, Meta-data

Applications

User Interface, Identity Management

• Formerly vertically integrated functional stacks now horizontal• Broad sharing across many different domains of use• Creative fusion hybridizing many domains of use

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Robert Glushko’s Model of IT-Enabled Business Models

Strategic/PolicyIssues

Business Processes

Information/Data Structure

ConceptualModel

PhysicalModel

ImplementedModel

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Challenges in Designing and Managing Business Models

Strategic/Policy

Business Process

Information/Data Structure

ConceptualModel

PhysicalModel

ImplementedModel

Top Mgmt

IT Mgrs

How to connect?

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Challenges in Designing and Managing Business Models

Strategic/Policy

Business Process

Information/Data Structure

ConceptualModel

PhysicalModel

ImplementedModel

Top Mgmt

IT Mgrs

How to connect?-Focus on processes-Create tools-Only feasible strategiesconsidered

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Shared Data

Supplier Customer

Modeling Services Exchange BetweenCustomer and Supplier

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Shared Data

LinkedProcesses

Supplier Customer

Modeling Services Exchange BetweenCustomer and Supplier

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Shared Data

LinkedProcesses

CoordinatedBusiness

Models

Supplier Customer

Modeling Services Exchange BetweenCustomer and Supplier

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Other Considerations in Managing Innovation in Services

Modularity and systems architectureWhen to re-use modules vs. use custom designs

Limits to modularity

Systems integration Managing tacit information in innovation processes

Easier to engineer codified knowledge

How to elicit tacit dimensions of knowledge? Managing multiple business models within a single

organization

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Why This Might Be the Right Time for Services Science

Major advances in IT, and how to implement business processes

Industry “gets it” – that we need new concepts for how to innovate in services

Services innovation needed to support long term growth in workforce that is now 70%+ devoted to services

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Why It Might NOT Be the Right Time

No institutional support for services innovation research within academia

We are all in our siloes

Academia is constructed not to change No institutional funding for services innovation

researchNSF has no category for funding!

No shared conferences, no shared journals, no shared sense of the key research challenges