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Open Services Innovation: Rethinking Your Business to
C t d G i N ECompete and Grow in a New Era
K t P t ti t VIA L d F XIIKeynote Presentation to VIA Leaders Forum XII
Henry ChesbroughHaas School of Business, UC Berkeley
Esade Business SchoolOpen Services Innovation Presentation by Professor Henry Chesbrough is licensed under a Creative Commons Attribution 3 0 Unported License
© 2011 Henry Chesbrough 1
Open Services Innovation Presentation by Professor Henry Chesbrough is licensed under a Creative Commons Attribution 3.0 Unported License.Permissions beyond the scope of this license may be available at www.openinnovation.net.
The Current Paradigm: The Current Paradigm: ggA Closed Innovation SystemA Closed Innovation System
ScienceThe
Market
Science&
Technology MarketTechnologyBase
ResearchInvestigations
Development New Products /Services
3R D
Open Innovationp
O
Other firm´s market
Our new market
I t l
License, spin out, divest
Internal technology base
Our currentI t l/ t l Our current market
External technology
Internal/external venture handling
External technology insourcing
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
Open Innovation:Then and Now
Then
• In April of 2003, the term “open innovation”In April of 2003, the term open innovation yielded ~200 Google pages, before I published the bookthe book
Now
• In April of 2010, a search on the same term yielded 21 9 million pages!yielded 21.9 million pages!– 5 orders of magnitude in 7 years
Bringing in the right partners – Open innovationBringing in the right partners Open innovation
> 75 companies and > 75 companies and > 7000 people at High Tech Campus Eindhoven
Research institutes
Corporate innovators
Economic development companies
Consultancy & services
Philips Research,Ronald Wolf, 10/08 7
The expansion of the corporate funnelp p
InsourcedIdeas /Technology ODM
OEM
Spin inStart upsIP insourcing AcquisitionsOEMIP insourcing Acquisitions
Front – end Development Commercializa
Incubators Spin outIP LicensingAlliances
Philips Research,Ronald Wolf, 10/08
Philips’ Open Innovation Tools, MethodsOI Power Questions Patent Scans
Literature Scans
Co-creation platforms
Landscape Expert
Internet searchesLandscape Expert
Networks
SMIS MarketSMIS Market Scans
ConnectUs
Website portal
9
DIY NDATechnology CarrouselSupplier
Roadshow
Procter & Gamble
• P&G used to be a VERY closed organization– “We invented Not Invented Here” – J. Weedman
• P&G financial crisis in 2000• P&G financial crisis, in 2000– Missed a series of quarterly financial estimates– Stock market lost confidence in the company– Stock price fell by more than half in 4 months!– CEO (Jagr) was fired
© 2008 Henry Chesbrough 10
P&G’s Stock Price: 8/1998-3/2000P&G s Stock Price: 8/1998-3/2000P&G Stock Price
120
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Pric
e pe
r sha
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98 98 98 98 98 98 98 98 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 99 00 00 00 00 00 00 00
© 2008 Henry Chesbrough 11
9/17/199810/1/199810/15 /199810/29 /199811/12 /199811/26 /199812/10 /199812/24 /1998
1/7/1 9991/21/1999
2/4/1 9992/18/1999
3/4/1 9993/18/1999
4/1/1 9994/15/19994/29/19995/13/19995/27/19996/10/19996/24/1999
7/8/1 9997/22/1999
8/5/1 9998/19/1999
9/2/1 9999/16/19999/30/199910/14 /199910/28 /199911/11 /199911/25 /1999
12/9/199912/23 /1999
1/6/2 0001/20/2000
2/3/2 0002/17/2000
3/2/2 0003/16/20003/30/2000
Searching for the Root Cause
• “We fundamentally had a growth problem. Our current brands were performing well. But we weren’t developing many new p g ybrands.” – C. Wynett
• To get new brands P&G needed to open up• To get new brands, P&G needed to open up.• Connect and Develop
– SpinBrush, Swiffer, Regenerist
© 2008 Henry Chesbrough 12
Example: Proctor & Gamble
A.G. LafleyPresident and CEOP&GP&G
“We will acquire 50% of our innovations from outside P&G”
Jeff Weedman 28 External Business Development managers
VP, External Business Development
Nabil Y. SakkadSVP, R&D, Global Fabric & Home Care
“There’s 1 5 Million people in the world who“We don’t care where good ideas come from.”
There s 1.5 Million people in the world who know about my business. I want them on my
team”
Larry Huston (just retired)120 Technology Entrepreneurs
VP, Knowledge & Innovation, Corporate R&D
The New P&G
• Many processes to enable open innovation– Technology scouts– Legal templates for IP, partneringLegal templates for IP, partnering– Investments in Innovation Intermediaries
Th G l N B h• The Goal Now: Become the open innovation partner of choice
© 2008 Henry Chesbrough 15
Initial Success
• More than 50 million units sold• Motorola became world #1 handset
manufacturermanufacturer
• Then….
© 2010 Henry Chesbrough 17
… The Trap Closes
• Motorola Krazr not a hit• Nokia phones overtake Motorola
Becomes the new #1– Becomes the new #1– Plus new entrants from Asia:
S• Samsung• HTC
• Motorola falls to #7 handset manufacturer todayy
© 2010 Henry Chesbrough 18
Nokia’s Own Trap
• Nokia becomes world leader in handsets• Global distribution, cost leader• Strong position in emerging economies• Strong position in emerging economies• But…
© 2010 Henry Chesbrough 19
The Trap Closes…. The Trap Closes
Ph b l i l di• Phones become gateway to multiple media and uses– Users personalize phones with apps
A l RIM d G l b ildi i ifi t• Apple, RIM and Google building significant platforms for third parties to build upon– Microsoft also trying to get back in
• Nokia remains #1 in units but not in profit• Nokia remains #1 in units, but not in profit
© 2010 Henry Chesbrough 20
Paul Horn’s ProblemPaul Horn s Problem
• More than half of IBM’s revenue is coming from its Global Services business
• Circa 2004, few if any IBM Research Staff were working on services innovation opportunitiesworking on services innovation opportunities
• How to sustain Industrial Research, if that research is not relevant to more than half ofresearch is not relevant to more than half of the company’s business?
21© 2010 Henry Chesbrough
Porter’s Value ChainPorter s Value Chain
Source: Michael Porter, Competitive Advantage, 198523© 2010 Henry Chesbrough
A Services Value WebA Services Value Web
BoundaryCo‐
creationCustomer
Engagement
Boundaryof the Firm
Customer
Elicit TacitService
Customer Experience Surrounding
EnvironmentKnowledgeOffering ‐ Partners
‐ Complementors‐ Investors
Design Experience Points
Investors‐ Third Parties
24© 2010 Henry Chesbrough
This is Not New ThinkingThis is Not New Thinking• “What the customer buys and considers value is never aWhat the customer buys and considers value is never a
product. It is always utility – that is, what a product does for him.”
– Peter Drucker, Management: Tasks, Responsibilities, Practices
• “People don't want to buy a quarter‐inch drill. They want a quarter‐inch hole!”
– Ted Levitt, Marketing Myopia
• “… it is the customer who drives the business, and customers are not differentiating between personalized, customized, or standardized offerings; they just want to get what they want.”
F k Pill 2007– Frank Piller, 200725© 2010 Henry Chesbrough
The Utilization DifferentialThe Utilization Differential
• Assume your car is driven 12,000 miles/year
• Assume your average speed is 30 mph
• You are driving the vehicle for roughly 400 hours– There are 8,760 hours in a yearThere are 8,760 hours in a year
– Therefore, your utilization is about 4.6%
• If your transportation were a service that untapped• If your transportation were a service, that untapped 95.4% becomes a source of value
Share vehicle acquisition operation maintenance costs– Share vehicle acquisition, operation, maintenance costs
– A potential Economy of Scale
26© 2010 Henry Chesbrough
Diamler’s Car2Go ServiceDiamler s Car2Go Service
• Carsharing program: www.car2go.comL h d i Ul G i• Launched in Ulm, Germany in
2008; Austin, TX in 2010• Ultra‐convenient: no fixed station to pick up or drop off; no required return time• No upfront commitment: no psecurity deposit, monthly fee, reservation cost
© 2010 Henry Chesbrough 27
UPS – Open Services Changes p gCustomers’ Processes
Customer CustomerCustomerOperations
CustomerShipping
CustomerOperationsOperations
UPS takes over customers’
© 2010 Henry Chesbrough 28
UPS takes over customers shipping dept!
Amazon – Open Services Creates Economies of Scope
• Amazon allows third party merchants to use its own tools tomerchants to use its own tools to create Amazon web pages• Creates consistent shopping experience for users • Increases “share of wallet” for AAmazon• Makes Amazon.com a more attractive Internet destination forattractive Internet destination for merchants
© 2010 Henry Chesbrough 29
Amazon Web Services – Open Services Creates Economies of Scale
• Amazon hosts other companies’ web sitescompanies web sites
• Converts fixed server farms to variable costs for customerscustomers• Increases Amazon’s utilization of its servers• Lowers Amazon’s own costs as a result
• Rapidly growing and profitable business forprofitable business for Amazon
© 2010 Henry Chesbrough 30
Asian PaintsAsian Paints
• Paint is a true commodity
• Fragmented distributionFragmented distribution– Distributors, jobbers, retailers, applicators
N i ibili f d f A i P i– No visibility of end customer for Asian Paints
– Little “do it yourself” interest by customers
• Brand Repositioning failed
• How to sustain differentiation?• How to sustain differentiation?
© 2010 Henry Chesbrough 31
Asian Paint’s PlatformAsian Paint s Platform• Provide the “back end” function for its distribution partners– Each applicator job had its own record– Save them time, money, and more information – Now Asian Paints can see through to the end customer for the first time!customer for the first time!
• Tremendous savings in supplying paints, fewer out‐of‐stock situationsout‐of‐stock situations
• Differentiation vs. competition, without relying on pricerelying on price
© 2010 Henry Chesbrough32
Evolution of d d lSemiconductor Business Models
System System System System
dTSMC IP
Foundry
Foundry
Open InnovationPl f
CaptiveMemory
IDMMemory Chip
DesignChipDesign
Platform External IP
Design Design
Integrated IDM FablessF d
TSMCOpen InnovationSystem Model Foundry
ModelOpen Innovation
Platform 33
© 2010 Henry Chesbrough
Implications for LeadershipImplications for Leadership …
El t th i t l d i i• Elevate the importance placed on services in your organization.
• Identify the utility of your offering to your• Identify the utility of your offering to your customers. How can you enhance it?
• Search for underutilized assets in your• Search for underutilized assets in your organization, and ways to unlock their value
• Create a platform that intertwines your product• Create a platform that intertwines your product and your service. Invite others to participate, both customers and third parties.p– Look for platforms you can join, to expand your business
© 2010 Henry Chesbrough 34
Concept Map – Open Services Innovation
Thi k f
Service Value Chain UtilizationProduct Platforms
Service Platforms
Changing the Offer
Think of Your
Business as a ServiceNew Revenue Models
Open Open
a Service
Transformed Tacit Knowledge
Knowledge AdvantageNew Revenue Models
Inertia
Services InnovationServices
InnovationCo‐CreationBusiness
Models
Experience PointsCoherence
Open I i
Customers Innovate TooFront End/Back End Platforms, part II
InnovationIntegration of InternalAnd External Knowledge
Increased Participation Ecosystems
Economies of Scale
Economies of Scope
Increased Participation Ecosystems
37© 2010 Henry Chesbrough
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 28India 17.0 60 17 23 28
U.S. 4.8 3 27 70 21
Indonesia 3 9 45 16 39 35Indonesia 3.9 45 16 39 35
Brazil 3.0 23 24 53 20
Russia 2 5 12 23 65 38Russia 2.5 12 23 65 38
Japan 2.4 5 25 70 40
Nigeria 2 2 70 10 20 30Nigeria 2.2 70 10 20 30
Banglad. 2.2 63 11 26 30
Germany 1.4 3 33 64 44
38
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 Stagesy gy g6. Platform business
model
6 Stages: 5. Integrated business d l
modelope
4. Externally aware business model
model
en
3. Segmented business model
y
2.Differentiated business model
3. Segmented business model
clos
1 Undifferentiated business model
2.Differentiated business model ed
39
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
Customer chooses
Customer picks from dealer stock
Customer does this
Customer does this
Customer, dealer or third party
Customer provides
Lease (Product focused
h)
dealer stock third party
approach)
Taxi Supplier chooses
Customer is picked up
Supplier does this
Supplier does this
By the ride, based on
Supplier provideschooses picked up does this does this based on
time and distance
provides
Enterprise Car Rental
Customer chooses from local
Customer picks up, or is picked up
Supplier does this
Supplier does this
By the day Customer is responsible
stock
Zip Car Customer chooses
From ZipCar locations
Supplier does this
Supplier does this
By the hour Customer purchaseschooses
from local stock
locations does this does this purchases from supplier40© 2010 Henry Chesbrough
Services PlatformsServices Platforms
• How can you sustain differentiation in services?– Little or no IP
Observable experiences– Observable experiences
– Therefore, easy to copy (?)
© 2010 Henry Chesbrough 41
Services PlatformsServices Platforms
H i diff i i i i ?• How can you sustain differentiation in services?– Little or no IPOb bl i– Observable experiences
– Therefore, easy to copy (?)
• Service Platforms can sustain differentiation• Service Platforms can sustain differentiation– Platform: a multi‐sided market The company’s technologies become the basis for others’– The company s technologies become the basis for others technologies and innovations
– The company is able to shape the direction of evolutionp y p– Others invest their money, making your service more valuable (value multiplier): iFund
© 2010 Henry Chesbrough 42
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
Automate(self-service)
Delegate(outsource)
Help meby doing allof it for meof it for me
(standard)Organize People
(Socio-economic models with intentional agents)Harness Nature(Techno-scientific models with stochastic parts)
43
Example: Call Centers
Collaborate(1970)
Augment(1980)
Delegate(2000)
Automate(2010)
M k t L t h (I di ) T h l V i t
Example: Call Centers
43
Experts: High skill people on phones Tools: Less skill with FAQ tools Market: Lower cost geography (India) Technology: Voice response system
Source: IBM Research
Wh T h l C i li ti i H d Why Technology Commercialization is Hard to Manage: Mapping Across Domains
Technical Inputs:
EconomicOutputs:
Business Model
• marketInputs:e.g.,
feasibility,performance
Outputs:e.g.,
value,i
• value prop.• offering
• how paidperformance price,profit
ow pa d• costs/margins
•scale•assets•assets
Measured in technical domain Measured in social domain
44© 2010 Henry Chesbrough
Engineering Business ModelsEngineering Business Models
• Given path‐dependent effects and cognitive limits on search….
• Can organizations develop processes to construct refine and pro actively changeconstruct, refine, and pro‐actively change their business models?
45© 2010 Henry Chesbrough
Other Companies StudiedOther Companies Studied
• IBM• IBM• Xerox• GE Aircraft Engines• Johnson & Johnson• Music industry• KLM Airlines (Holland)• KLM Airlines (Holland)• Ericsson (Sweden)• TSMC (Taiwan)• London Tube/Alstom (UK)• Asian Paints (India)• ShaanGu (China)ShaanGu (China)• SSIPEX (China)• El Bulli (Spain)
© 2010 Henry Chesbrough 46
Blueprint for Overnight Hotel Stay Service Common Restaurant, Mikko Järvilehto – Innovation in Services and Business Models Course
Physical Evidence Menu
ElevatorsHallways
Cart for bagsEmployee
Delivery trayFood
BillLobbyRoom
AmenitiesFood
Desk PaperworkHotel exterior Cart for bags
EmployeeAd/WebsiteRestaurant exterior
Employees desk and
Interior, Table and
Drink /Food
Employees Supply of f d& RestroomBill
Restaurant exteriorPay
C t
Evidence MenuHallwaysRoom
Employee dress
Food appearance Hotel exterior
Parking
AmenitiesBathroom
FoodLobbyKey
Parking Employee dress
Ad/Website exteriorParking
desk anddress
Table andtableware
/Food menu
memo food&drinks
RestroomBill exteriorParking
Pay options
O t
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
reservation
Line of Interaction
Arrive at restaurant
Ask for table
Go to table
Receive menu
Order drinks and food
Eat OrderBill
Pay Visit Toilet
Leave
Onstage Contact
Employee Actions
Greet and take bags
Process registration Deliver bags Deliver food Process
checkout
Line of Visibility
Greet &Check re‐servations
EscortUse payment system
Delivermenu
Write order
DeliverFood
DeliverBill
Backstage Contact
Employee Actions
Make reservation for guest
Take bags to room
Take food order
Li f I t l I t ti
Take food Order
Support Processes
Prepare food Registration system
Registration system
Reservation system
Line of Internal Interaction
Payment system
PrepareFood
TableChart
47© 2010 Henry Chesbrough