Open Services Innovation : Book Review

Cover of Open Services Innovation

Ever wondered how to get off the innovation treadmill of ever shortening product lifecycles and rapid commoditization of markets that is exhausting the management teams of many companies in developed economies?

Henry Chesbrough has, and he believes the solution is Open Service Innovation as documented in his book of the same title. Can it really help us?

Chesbrough is, of course, the ‘father‘ of Open Innovation – due to his seminal work (2003). Having challenged our thinking in the area of product innovation, now he turns his attention to services.

He begins with a short analysis of the challenges many companies now face in terms of hyper competition and operating in an environment of rapid new technological advances.  Best practices of TQM, Six Sigma and supply chain management are actually part of the problems he suggests. Now so widely adopted, it has made it harder for the companies that practice them to differentiate themselves from their competitors.

Chesbrough’s hypothesis is that open service innovation offers some respite from the innovation treadmill. This is a process with four key aspects :-

  • Think of your business as a service business.

  • Co create with customers

  • Operate in a climate of openness.

  • Change your business model to support your business as a service business.

To support his theory he provides some persuasive case studies from both large and small firms.

The large company case studies include Xerox – who managed to transform their business from a producer of copying machines to a provider of “managed print services”.  Rather than just buy a copier from Xerox, their customers can now sign a contract with Xerox to provide all the copy services it needs. Xerox will manage and maintain all a company’s copiers no matter which company manufactured them. For this service Xerox charges for the copies that are made.

Chesbrough argues that this arrangement benefits both Xerox and their customers.  For their customers a fixed cost is converted to a variable cost, there are on-going cost savings, and the companies can reduce their headcount by not having to retain people who know the copiers. For Xerox, the benefits mean that they get closer to their customers, build their knowledge about copying and understand their customers’ needs at a deeper level.

In the area of small businesses, Chesbrough provides the example among others of Best Buy which as a retailer struggled to compete with Walmart on the price of household electronics. However, they changed their business model to offer the ‘Geek Squad ‘ a team of branded installation technicians complete with black and white VW cars. They were available to install the consumer’s electronics in their home immediately after purchase. This meant that the consumer could benefit from their purchase immediately - without the difficulty of the set up. It would be laborious for the consumer to learn about the set up of his particular equipment when they would only need to do it once. Because of this, many of them are prepared to pay for the service offered by Best Buy.

Chesbrough is a true advocate for service innovation. He believes that by turning your business into a service business you are differentiating yourself significantly. You are solving the ‘whole of your customers problems’. What’s more, providing a service means more (human) contact with the customer, this in turn means that firms can learn more about their customers and then improve the service even further.

The Holy Grail according to Chesbrough is to create a platform for services – as Amazon has done with its retail platform and Apple has done with its I-Tunes platform. The platform creates a virtuous circle of attracting many different services that can attract many customers. The more customers there are then the greater interest by partner organizations to develop applications that further build the platform.

The platform also helps a company to capture more and more data about its customers which can be used to further enhance the service and offer customers more value.

There is no doubt that Amazon and Apple have had phenomenal success by developing such platforms or ecosystems around their brands.  And Chesbrough strengthens his argument by pointing out how Apple’s competitors – such as Motorola and Nokia - which kept their focus on handsets rather than the broader customer problem of mobile connectivity and services have lost market share in this new competitive environment.

However, to read Chesbrough – you could think that many companies could switch easily from product to service organization, change their business model and create a platform.

It is of course Chesbrough ‘s role to show us a vision of how to innovate to achieve growth – but in his rush to celebrate the platform and changing the business model  he appears to underestimate just what is involved at an organizational level for many ‘product’ companies to accomplish such feats.

In one moment of pragmatism, he does acknowledge that changing an organization’s  business model is challenging. As he says, more than likely the whole culture is invested in the way things were – and it will be hard to change.

However, I think he also underestimates the challenges for many companies of other parts of his model/ process.

“Openness” is a huge challenge for many companies large and small – how can you protect your IP? How can you protect your strategy and plans?

Understanding customers and what they really want remains a challenge in many industry sectors.

Chesbrough is disappointed by how little the universities are researching the service sector. Such research, he feels might help identify how to grow it - to the benefit of western economies. He blames the 'silo mentality' of academic departments. An interesting parallel perhaps with the barriers that some companies also face in becoming more service orientated.

Chesbrough is generous in sharing a vision of how the West can achieve growth. As we know, many politicians are currently scratching their heads over this one. 

Open Services Innovation offers a great vision for the future and provides inspiration for how companies in both developed and developing economies could create more high value and satisfying jobs and also provide added value services that people are prepared to pay a premium for.

However, it won’t be easy.

AnatellÔ score as a tool to assist with innovation and growth 4/5.

Open Services Innovation is published by Jossey- Bass April 2011 242p

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