Presentation of the Book Henry Chesbroughfaculty.haas.berkeley.edu/lyons/OpenServices.pdf · Presentation of the Book Henry Chesbrough ... – Ted Levitt, Marketing Myopia ... India

Open Services Innovation

Presentation of the Book

Henry ChesbroughHaas School of BusinessHaas School of Business

UC Berkeley

© 2011 Henry Chesbrough 1

2003

20062006


The Economic Pressures on Innovation

Ow

n M

arke

tR

even

ue

enue

s

Internal

R

Rev

e

0 Internal.Development.Costs

Cos

ts


The Commodity Trap

PinOwn

Shorter

Product Life

n the Marknu

e

wn rk

etve

nue

OwnMarket

Revenue

Internal

eet

Rev

en

0

Ow

Mar

Rev

Internal Internal Development

CostsRising costs of innovationC

osts

InternalDevelopmentCosts


The New Business Model of Open Innovation

NR

evNew Mkts New

venues

e

Licensing

Spin-off

OwnMarket

RevenueI t l

Own Market

RevenueRev

enue

Internal.Development.Costs

Internal and External Dev.

CostsCost and Time savings fromC

ost

ClosedModel

Open InnovationBusiness Model

Cost and Time savings from leveraging External development


Model Business Model

Motorola’s Razr


Initial Success

• More than 50 million units sold• Motorola became world #1 handsetMotorola became world #1 handset

manufacturer

• Then….


… The Trap Closes

• Motorola Krazr not a hit• Nokia phones overtake MotorolaNokia phones overtake Motorola

– Becomes the new #1Plus new entrants from Asia:– Plus new entrants from Asia:

• Samsung• HTCHTC

• Motorola falls to #7 handset manufacturer todaytoday


Nokia’s Own Trap

• Nokia becomes world leader in handsets• Global distribution cost leaderGlobal distribution, cost leader• Strong position in emerging economies

B• But…


…. The Trap Closes

• Basis of competition shifts from handset to applications and servicespp

• Phones become gateway to multiple media and usesand uses

• Apple, RIM and Google building significant platforms for third parties to build uponplatforms for third parties to build upon– Microsoft also trying to get back in

ki i i i b i fi• Nokia remains #1 in units, but not in profit© 2010 Henry Chesbrough 10

Another Escape Route: Services

• Wrap services around your products• Turn “products” into “solutions”Turn products into solutions• Co-create innovations with your customers

U f• Use openness to get more from specialization

• Build platforms to attract others to add to your solutions


The shift toward services in the USThe shift toward services in the US

(A) Agriculture:

(G) Goods:

(S) Services:

actual forecast

12Source: http://www.nationmaster.comOECD reports; IBM Corporation© 2010 Henry Chesbrough

Definition of “Services”Definition of Services

• Root: servitium (slavery see also servant)Root: servitium (slavery, see also servant)

• More usefully:

“ i i h i h di i f“A service is a change in the condition of a person, or a good belonging to some

i i b h b h leconomic entity, brought about as the result of the activity of some other economic entity, i h h l f h fiwith the approval of the first person or

economic entity.” (Hill, 1977)

13© 2010 Henry Chesbrough

Paul Horn’s ProblemPaul Horn s Problem

• More than half of IBM’s revenue is comingMore than half of IBM s revenue is coming from its Global Services business

• Circa 2004 few if any IBM Research Staff were• Circa 2004, few if any IBM Research Staff were working on services innovation opportunities

• How to sustain Industrial Research, if that research is not relevant to more than half of the company’s business?


Innovation in Products and TechnologiesInnovation in Products and Technologies

=

Innovation in Services


Porter’s Value ChainPorter s Value Chain

Source: Michael Porter, Competitive Advantage, 198516© 2010 Henry Chesbrough

A Services Value WebA Services Value Web

Boundaryf h FiCo‐

creationCustomer

Engagementof the Firm

Customer Experience Surrounding

Elicit Tacit

Knowledge

Service

Offering

p SurroundingEnvironment‐ Partners‐ Complementors

Design Experience Points

p‐ Investors‐ Third Parties

Points


This is Not New ThinkingThis is Not New Thinking

• “What the customer buys and considers valueWhat the customer buys and considers value is never a product. It is always utility – that is, what a product does for him ”what a product does for him.– Peter Drucker, Management: Tasks, Responsibilities, PracticesResponsibilities, Practices

• “People don't want to buy a quarter‐inch drill They want a quarter inch hole!”inch drill. They want a quarter‐inch hole!– Ted Levitt, Marketing Myopia


Growth [and innovation] areGrowth [and innovation] are Rooted in the Division of Labor

Adam Smith


The division of labor is limited by the extent of the market

George Stigler


Economic activity will moveinside the firm wheneverinside the firm wheneverthe transactions costsof using the market exceedof using the market exceedthose of using the firm (and vice versa)

Oliver Williamson

(and vice versa)


How Services Markets Can GrowHow Services Markets Can Grow

• Specialization can alter Transactions CostsSpec a at o ca a te a sact o s Costs• Greater specialization can “tip” firms to take service activities out into the market, extending gthe division of labor possible (Stigler)– Paychex as an example

• This enables a powerful source of organic growth f i fifor services firms– Virtuous cycle: from Smith to Williamson to Stigler, back to Smithback to Smith


The Virtuous Services Market CycleThe Virtuous Services Market Cycle

Larger market sizeenables more DoL

More specializationreducestransactiontransactioncosts in themarket

Lower transaction costsLower transaction costsIncrease the marketsize 23© 2010 Henry Chesbrough

PaychexPaychex

• Fifty years ago, every company paid its own workersy y g , y p y p– Payroll clerks

• Paychex began during the days of the mainframe computer

• Then PCs made computing ubiquitous• But Paychex still grew due to its superior knowledge• But Paychex still grew, due to its superior knowledge and expertise in payroll

• Today, many companies employ a specialist firm to y, y p p y pprocess their payroll– a market that did not exist 50 years ago


The Utilization DifferentialThe Utilization Differential

• Assume your car is driven 12,000 miles/yearAssume your car is driven 12,000 miles/year

• Assume your average speed is 30 mph

• You are driving the vehicle for roughly 400 hoursYou are driving the vehicle for roughly 400 hours– There are 8,760 hours in a year

– Therefore, your utilization is about 4.6%, y

• If your transportation were a service, that untapped 95.4% becomes a source of value– Share vehicle acquisition, operation, maintenance costs

– A potential Economy of Scale


Diamler’s Car2Go ServiceDiamler s Car2Go Service

C h i• Carsharing program: www.car2go.com• Launched in Ulm, Germany in 2008; Austin TX in 20102008; Austin, TX in 2010• Ultra‐convenient: no fixed station to pick up or drop off; no required return timereturn time• No upfront commitment: no security deposit, monthly fee, reservation cost


UPS – Open Services Changes Customers’ Processes

CustomerOperations

CustomerShippingOperations Shipping

CustomerOperations


UPS takes over customers’ shipping dept!

Is This a Good Deal for UPS?Is This a Good Deal for UPS?

• Deeper relationship with the customerDeeper relationship with the customer• More responsibility for UPS

S l b i ’ l• UPS learns more about its customers’ total shipping needs– vs. those given to UPS in the past– Opportunity for economies of scale

• Greater visibility into customer’s processes that precede shipmentp p– Opportunity for economies of scope


Is This a Good Deal for UPS’ Customers?Is This a Good Deal for UPS Customers?

• Internal resources freed up for higher useInternal resources freed up for higher use that differentiates company

• UPS knows more about shipping than any• UPS knows more about shipping than any of its customers

Deeper specialization– Deeper specialization– Better career paths for its people

Th k t tili ti d i li ti t• Thanks to utilization and specialization, not a zero sum game


Amazon – Open Services Creates fEconomies of Scope

• Amazon allows third party merchants its own tools to create Amazon web pagesAmazon web pages

• Fulfillment by the third party• Billing and collection by Amazon

• Creates consistent shopping pp gexperience for users • Increases “share of wallet” for Amazon with no merchandisingAmazon, with no merchandising risk!• Makes Amazon.com a more

i d i i f


attractive Internet destination for shopping for many items

Amazon Web Services – Open Services f lCreates Economies of Scale

• Amazon hosts other companies’ web sites

• Converts fixed server farms to variable costs for customers• Increases Amazon’s utilization of its serversutilization of its servers• Lowers Amazon’s own costs as a result

• Rapidly growing andRapidly growing and profitable business for Amazon• Raises the bar for its


• Raises the bar for its competitors

An Iberian Example: El Bulli


The ElThe El B lliB lli PlatformPlatformThe El The El BulliBulli PlatformPlatformF Ad i t di l l t ki• Ferran Adria studies molecular gastronomy, working with Herve This, a French physical chemist

• Adria brings this to El Bulli restaurant is the Lab• Adria brings this to El Bulli, restaurant is the Lab• Adria launches many business experiments

B il k• Borges: oils, snacks• Lavassa: coffee

N H H l F G d Nh b• N H Hoteles: FastGood, Nhube• Iberian Airlines (with FastGood)

33

• Careful not to dilute the El Bulli brand© 2010 Henry Chesbrough

Figure 1 ‐ Evolution of Semiconductor Business Networks

System System System System

FoundryTSMC IP

C i

Foundry

Foundry

Open InnovationPlatform External IP

CaptiveMemory

IDMMemory Chip

DesignChipDesign

IntegratedSystem

IDMModel

FablessFoundry Model

TSMCOpen Innovation

Platform 34© 2010 Henry Chesbrough

TSMC’s Open Innovation PlatformTSMC s Open Innovation Platform

• TSMC has >50% share of foundry capacity WWS C as 50% s a e o ou d y capac ty• External suppliers of design and process IP design for TSMC first– TSMC has vast internal library of IP– TSMC tests and validates third‐party IP on its processes

• Open Innovation Platform: TSMC now certifies that designs compliant with its Platform will yieldthat designs compliant with its Platform will yield first time through the process

• Tremendous competitive barrier to overcomeTremendous competitive barrier to overcome


Concept Map – Open Services Innovation

Think of

Service Value Chain UtilizationProduct Platforms

Service Platforms

Changing the Offer

Your Business as a Service

T it K l d

Knowledge AdvantageNew Revenue Models

Open Services

Innovation

Open Services

InnovationCo‐Creation

Transformed Business Models

Tacit Knowledge

Inertia

O

Experience Points

Customers Innovate Too

Coherence

Front End/B k E d Platforms part II Open

InnovationIntegration of InternalAnd External Knowledge Economies of Scale

Economies of Scope

Back End Platforms, part II

Increased Participation Ecosystems


What to do Monday Morning…What to do Monday Morning…

• Elevate the importance placed on services in your organization.

• Identify the utility of your offering to your customers. How can you enhance it?How can you enhance it?

• Experiment with tools like service blueprinting to articulate and enhance your service offeringS h f d tili d t i i ti• Search for underutilized assets in your organization, and ways to unlock their value

• Create a platform that intertwines your product and p y pyour service. Invite others to participate, both customers and third parties.– Look for platforms you can join, to expand your businessLook for platforms you can join, to expand your business



BackupBackup


Top Ten Nations in 2003 by Labor Force SizeA = Agriculture, G = Goods, S = Services

Nation % WWLabor

% A

%G

%S

25 yr %delta S

China 21.0 50 15 35 191

India 17.0 60 17 23 28

U S 4 8 3 27 70 21U.S. 4.8 3 27 70 21

Indonesia 3.9 45 16 39 35

Brazil 3.0 23 24 53 20

Russia 2.5 12 23 65 38

Japan 2.4 5 25 70 40

Nigeria 2.2 70 10 20 30

Banglad. 2.2 63 11 26 30

G 1 4 3 33 64 44

40

Germany 1.4 3 33 64 44

>50% (S) services, >33% (S) services Source: http://www.nationmaster.comOECD reports; IBM Corporation© 2010 Henry Chesbrough

Business Model Maturity StagesBusiness Model Maturity Stages6. Platform business

model

6 Stages: 5. Integrated business model

open

4. Externally aware business model

3. Segmented business model

cl

2.Differentiated business model

losed

41

1. Undifferentiated business model

© 2010 Henry Chesbrough

Selection of Vehicle

Delivery of Vehicle

Maintenance of Vehicle

Information & Training

Payment/ Financing

Protection/ Insurance

Car Purchase or Lease (P d t

Customer chooses

Customer picks from dealer stock

Customer does this

Customer does this

Customer, dealer or third party

Customer provides

(Product focused approach)

Taxi Supplier chooses

Customer is picked up

Supplier does this

Supplier does this

By the ride, based on time and di

Supplier provides

distance

Enterprise Car Rental

Customer chooses

Customer picks up, or

Supplier does this

Supplier does this

By the day Customer is responsible

from local stock

is picked up

Zip Car Customer From ZipCar Supplier Supplier By the hour Customer chooses from local stock

locations does this does this purchases from supplier42© 2010 Henry Chesbrough

Services PlatformsServices Platforms

• How can you sustain differentiation inHow can you sustain differentiation in services?– Little or no IP– Little or no IP

– Observable experiences

Therefore easy to copy (?)– Therefore, easy to copy (?)


Services PlatformsServices Platforms

• How can you sustain differentiation in services?y– Little or no IP– Observable experiences

h f ( )– Therefore, easy to copy (?)

• Service Platforms can sustain differentiation– Platform: a multi‐sided market– Platform: a multi‐sided market – The company’s technologies become the basis for others’ technologies and innovations

– The company is able to shape the direction of evolution– Others invest their money, making your service more valuable (value multiplier): iFund( p )


By understanding and accelerating work evolution, Service Science will impact productivity of human-tool systems

ToolSystem

HumanSystem

Collaborate(incentives)

Augment(tool)

Help meby doing some

of it for me(custom) 21 Z

AutomateDelegate

(custom)

Help meby doing all

21 Z(self-service)(outsource)by doing all

of it for me(standard)

Organize People(Socio economic models with intentional agents)

Harness Nature(Techno scientific models with stochastic parts)

43

(Socio-economic models with intentional agents) (Techno-scientific models with stochastic parts)

Collaborate(1970)

Augment(1980)

Delegate(2000)

Automate(2010)

Example: Call Centers

45

Experts: High skill people on phones Tools: Less skill with FAQ tools Market: Lower cost geography (India) Technology: Voice response system

Source: IBM Research

Why Technology Commercialization is Hard Why Technology Commercialization is Hard to Manage: Mapping Across Domains

Business M d lTechnical

Inputs:e.g.,

f ibilit

EconomicOutputs:

e.g.,

Model• market

• value prop.• offeringfeasibility,

performancevalue,price,profit

• offering• how paid

• costs/margins•scalesca e•assets

Measured in technical domain Measured in social domain


Engineering Business ModelsEngineering Business Models

• Given path‐dependent effects and cognitiveGiven path dependent effects and cognitive limits on search….

• Can organizations develop processes to• Can organizations develop processes to construct, refine, and pro‐actively change their business models?their business models?


Other Companies StudiedOther Companies Studied

• IBM• Xerox• GE Aircraft Engines• Johnson & Johnson• Music industry• KLM Airlines (Holland)• Ericsson (Sweden)• TSMC (Taiwan)• London Tube/Alstom (UK)• Asian Paints (India)( )• ShaanGu (China)• SSIPEX (China)• El Bulli (Spain)( p )


Blueprint for Overnight Hotel Stay Service Common Restaurant, Mikko Järvilehto – Innovation in Services and Business Models Course

Physical Evidence Menu

ElevatorsHallways

Room

Cart for bagsEmployee

dress

Delivery trayFood

appearance

BillLobby

Hotel exteriorParking

RoomAmenitiesBathroom

Food

Desk Paperwork

LobbyKey

Hotel exteriorParking

Cart for bagsEmployee

dressAd/Website

Restaurant exteriorParking

Employees desk anddress

Interior, Table andtableware

Drink /Food menu

Employeesmemo

Supply of food&drinks

RestroomBillRestaurant exteriorParking

Pay options

Customer Actions Give bags to

bellperson Arrive at hotel Check in Go to room Receive bags Call room service

Receive food Sign/tip Eat Sleep/shower Check out

and leaveMake

reservationArrive at restaurant

Ask for table

Go to table

Receive menu

Order drinks and food

Eat OrderBill

Pay Visit Toilet

Leave

Onstage Contact

Employee

Greet and take bags

Process registration Deliver bags Deliver food Process

checkout

Line of Interaction

Greet &Check re‐servations

EscortUse payment system

Delivermenu

Write order

DeliverFood

DeliverBill

Backstage Contact

Employee

Actions

Make reservation Take bags to

roomTake food

order

Line of Visibility

Take food Orderp y

Actions

Support Processes

for guest room

Prepare food Registration system

order

Registration system

Reservation system

Line of Internal Interaction

Payment system

PrepareFood

TableChart

Processes yyy



Documents

Presentation of the Book Henry Chesbroughfaculty.haas.berkeley.edu/lyons/OpenServices.pdf · Presentation of the Book Henry Chesbrough ... – Ted Levitt, Marketing Myopia ... India