Professor Henry Chesbrough, my friend from Berkeley, is a well known author of the book Open Innovation (2003). He has developed the issue of open innovation in the second book Open Business Models (2006). In his newest book Open Services Innovation (2011) he continues the topic concentrating on services. Although all three book deal with the similar problems and even same examples, the new one contains many interesting analysis and concepts.

Henry’s text is always clear and concrete containing many illuminating examples. This is especially true in his last book.

There is two parts: part one to develop framework and part two for open innovation in practice. I will analyze the framework of the book.

Background

We are any more living in industrial society. There is a great transformation from product-based economy towards service-based economy. About 80 percent of economic activities in developed counties come from service.

The business models are not of the form: product + free services. Instead it is: service + attached products

Commodity trap

In global competition manufacturing practices are easy to imitate and move to low cost regions, like China and India. In this competition products turn to “commodities” that are “sold on the basis of their costs, not their value”.

This kind of commoditization makes extremely difficult to get profit because margins are so low. The way out of the commodity trap is to develop business from a service perspective.

The framework for open service innovation

To develop service business a new framework is needed. The elements of the framework are according to Chesbrough the following four concepts or principles:

1.      Think of your business as a service business

2.      Invite customers to co-create innovation with you

3.      Use open innovation to accelerate and deepen service innovation

4.   Transform your business model with open service innovation.

For each a separate chapter is devoted in the first part of the book.

Service business

Service is “a change in the condition of a person, or a good belonging to some economic entity, brought about as the result of the activity of some other economic entity, with the approval of the first person or economic entity”. The quote is from the Standard Industrial Classification taxonomy developed by US Department of Commerce. Service is a performance where the customer’s satisfaction and experience will decide the value of service, in the last instance.

The clue to understand service is to separate front end and back end. Front end (or front stage) is phase of serviced with which customers are in direct contact. It must be flexible and customized. On the other hand, back end (or back stage) guaranties the efficiency and security of service. The secret of back end is standardization of internal processes. For this issue see the book Service is front stage by James Teboul (2006).

In different services the roles of front end and back end vary. Say in restaurant business there are fast food restaurant, table service restaurants and gourmet restaurant and even chef-performance restaurants where food is prepared under the eyes of customers. It is easy to imagine how the roles of customers and serviced providers change and what are front/back divisions.

I think that the central point in service business development is expressed in the following quote (p. 54):

“[Suppliers] have to figure out how to give the customer what the customer needs, while also figure out a way to do this profitably for themselves. This change introduces a tension between standardization, which makes providing the service more cost-effective for the supplier, and customization, which more closely matches the customer’s need but may require different solutions for each customer.”

Prahalad and Krishnan use the formula N=1 to express the challenge of customization in their book The New Age of Innovation (2008): value is determined by one consumer-cocreated experience at a time.

Co-creation

Value is cocreated with customer. Right, but how does this take place. Open Service Innovation is not giving much in this important issue. It refers to managing tacit information. The best books in this respects are Erik von Hippel’s Democratizing Innovation (2006) and Nonaka’s and Takeuchi’s The Knowledge Creating Companies(1995).

Open service innovation

The chapter 4, Extend services innovation outside your organization, is the best part of the whole book.The chapter starts with the standard Chesbroughian definition of open innovation.

“Open innovation combines internal and external ideas into new products, new architectures, and new systems. It takes also internal ideas to market through external channels, outside the current businesses of the firm, to generate additional value.” (pp. 68-69)

This is nothing new, but the other concepts attached to it are valuable. I mean the concepts of specialization and economies of scale and scope.

Specialization makes possible “saving money for the customer while developing greater capability as a provider” (p. 75). As an example, think about payroll service, like Paychex.  Specialization in service is constrainted  by transaction costs: is it cheaper to buy a service than make it. So this related to outsourcing, too.

Economies of scale refer to reduction of cost of some item as more volume of that item is produced. Economies of scale are reached by two ways in service, at least. First, information technology is easy to scale, just adding more memory, servers, routers etc. Second, service provider gets more knowledge about customers through more transactions. This new knowledge might be very valuable asset when developing new and better services. And even “knowledge advantages of scale can continue to accumulate indefinitely” (p. 79).

Economies of scope refer to the efficiencies that result from offering of multiple items form a single source. As a standard example, think about department stores: many shops under one roof (good in cold or warm climate).  By economies of scope one can reduce the total costs of a product of service to customers.

Let’s consider now the most important contribution of this book, service platforms.

Examples are iTunes shop for music in Apple ecosystem, a kind of department store for music and Apple App Store Web for buying applications for iPad and iPhone. Similarly in the case of Amazon. Amazon’s platform was early to sell and stock books. Later “the company provides a platform for other merchants to showcase their wares on Amazon’s Web site” (p. 84). So it becomes an Internet shopping platform.

What is happening here, is a twofold business model:

·         Customers get more items to buy form the same site

·         Other providers are allowed to use the platform to offer their products

·         Both features lead to new revenue to the owner of platform

The conclusion of Henry Chesbrough is simply: “The ultimate goal for a service business is to become a platform for other businesses to build on.” (p. 105)  This way a firm can move from “the commodity business model” towards “the platform business model”.

Comments

In my mind the new book of Henry is an important extension of his original open innovation model (paradigm) to include service innovation. Especially, the treatment of specialization, economies of scope and scale are useful.  The best contribution is the development of the platform business model.

One thing I’m wondering is the concept of open service innovation itself. The original concept of open innovation was related to innovation processes: use external as well as internal knowledge in creation of innovation. The “original”concept of open innovation in Chesbrough 2003 was collaboration in creating innovation and this process was mainly sharing or changing ideas. Now it seems that “open service innovation” is not so much related to creating new ideas than just colloboration in production.

The concepts like specialization and economies of scope and scale are based on transaction cost theory of Ronald Coase and Oliver Williamson. In this conception, service “innovation” is a strategy of a company to specialize to some service process and find partners to provide the whole service package with  the company.

The other critical comment is related to co-creation and user experience. This topic is covered nowadays in design. Especially service design is becoming a major tool to develop service innovation. See my blogs about Tim Brown, Roger Martin and Roberto Verganti, which have published the best books in the field. The word design is lacking in the index of Open Service Innovation.

Service innovation research

In the final chapter of the book there is a good proposal to develop service research. I agree with Henry when he writes:

“In service, however, no academic community of scholars shares a common mission to understand the roots of the services arena of economic activity or how to advance it. Granted, services subfields are emerging in separate, siloed academic areas, but precious few attempts to integrate them have been undertaken, and this is much needed.” (p. 193)

In universities we have to develop a new holistic, integrated service science. It must be transdisciplinary, integrating research from economics, psychology, information science, management, design etc. I feel this a personal challenge, too.